• USD/JPY continues its prolonged, orderly and slow technical descent.
  • Yen strength and general US dollar weakness erode USD/JPY.
  • US Treasury yields fade as markets worry about virus spread and closures.
  • Yen favored by real interest rates and modest safety-trade.
  • FXStreet Forecast Poll predicts a bottom but no bounce

If the USD/JPY saw it largest one day rally since the March panic with the Pfizer vaccine announcement on November 9th, the dollar's steady fall over the subsequent nine sessions is proof, if any were needed, that the grinding reality of the pandemic is still the overriding factor in the markets.

That Monday the USD/JPY closed at 105.36, up exactly two figures from its open. From the high on November 12th of 105.40 to the Friday close at 103.83 the pair has shed 77.5% of its gains.

Technically, the USD/JPY remains immured in a descending channel that can be stretched back to December 2016, though the much narrower channel from the beginning of July is more relevant for current trading. Support is primarily at 103.30 which marks the bottom on November 6 and the start line for the rally on the 9th. Those were the lowest points since the crash and immediate recovery in March.

The accelerating rise in COVID-19 diagnoses in the United States, even though there have been similar increases in Europe and to a lesser degree in Japan, has sapped the safety-trade resort to the US dollar. The course of the pandemic in the US and the potential for economic damage has kept the greenback on the general defensive since early in the month. The yen's traditional safe-haven status has added to the dollar's decline.

The yen has been favored by the differential in real interest rates, primarily due to the very low inflation in Japan. Even though the Bank of Japan overnight call rate is -0.1%, the national Consumer Price Index (CPI) registered –0.4% for the year in November. In comparison the mid-point in the Fed Funds target range is 0.125% but annual US CPI in October was 1.2%. The yen is strengthened by deflation and the dollar is weakened by inflation to a greater degree than the difference in the base interest rates.

Slipping US Treasury yields are also undermining the dollar. The yield on the 10-year Treasury is off 15 basis points after reaching a three month high on November 10th of 0.972%. The bond closed at 0.826% on Friday.

Japan statistics November 16-November 20

Japanese statistics provided no market impetus this week. However, the advent of deflation in the October national CPI figures, is a source of concern for the economy and the Bank of Japan.

Revisions to September's Industrial Production figures were as expected: monthly 3.9% from 4.0% and unchanged at 9% on the year.

Imports dropped 13.3% on the year in October, more than the -9% estimate though not as weak as September's 17.4% decline. It was the 18th straight decrease. Exports slipped 0.2% on the year, much better than the -4.5% prediction and the 4.9% drop in September. It was the smallest decrease in 22 straight negative months.

National CPI fell 0.4% on the year in October, missing the 0.3% forecast and a sharp drop from flat in September. It was the first outright deflation since September 2016. Core CPI was -0.2% also down from flat in September.

The Jibun Bank Manufacturing PMI for November was 48.3 from 48.7 prior. The forecast was 48.9. The contracting string is 19 months.


US statistics November 16-November 20

American economic information was also limited and overshadowed by the economic impact of the pandemic.

Retail Sales in October missed expectation after five strong months, rising 0.3% on a 0.5% prediction and September was revised to 1.6% from 1.9%. Sales ex-Autos rose 0.2% with a 0.6% projection and September's result was reduced to 1.2% from 1.5%. The Control Group added 0.1% on a 0.5% forecast and its prior was revised to 0.9% from 1.4%.

Industrial Production added 1.1%% in October, just about the 1.0% forecast while September was revised to -0.4% from-0.6%. Capacity Utilization rose to 72.8% from 72% in October.

The home construction industry remained strong. Building Permits were unchanged at 1.545 million in October, and Housing Starts rose to 1.53 million from 1.459 million annualized.

Initial Jobless Claims climbed to 742,000 in the November 13 week from 711,000. It was the first rise in nine weeks and underlined concerns that the pandemic restrictions imposed in several states are driving layoffs. Continuing Claims dropped to 6.372 million in the November 6 week from 6.801 million prior.

Existing Home Sales, 90% of the US market, rose 4.3% in October to an annualized rate of 6.85 million. It was the highest rate of sales since the housing bubble of over a decade ago.


USD/JPY outlook

Currency markets are prepared to reward the dollar for an improving global economy, witness the rush higher in the USD/JPY on November 9th.

In order for that to become a general trend and overcome the persistent and long-term penchant to move lower, the US will have to surmount its COVID-19 outbreak. Until infection rates decline and the threat to the economy is removed, the dollar and the USD/JPY will be unable to benefit from the historically better US growth.

Technically, all indicators point lower. The descending channel is intact and well-defined. Resistance lines beginning at 104.30 are more plentiful and endorsed by far greater price action. The moving averages are all above market levels.

Countering the trend lower, or potentially doing so, are two fundamental factors. First the USD/JPY is approaching the range near 100 yen where the last reversal took place in November and December 2016. The Japanese government will not want to burden any recovery with an expensive yen. Second the dollar recovery is waiting for the all-clear signal from the US economy.

The COVID-19 pandemic has dominated markets for nine months. Hopefully, vaccines will end its hold and permit normal economic activity, but that recovery may still be a few months away.

Japan statistics November 23-November 27

National prices slipped into deflation in October and that is expected to continue in November with the Tokyo CPI. The overall index is to fall to -0.6% from -0.3% and the core index to core index is forecast to rise to -0.1% from -0.2% in October.

The Bank of Japan has waged a long fight against the recurring bouts of deflation that have plagued the Japanese economy. Price changes were last negative in 2016 and early 2017. The return of outright deflation in just over three years, even accompanying the unusual circumstance of the pandemic, has to be a major concern for the Japanese economy and the over-matched monetary policy of the BOJ.


US statistics November 23-November 27

In the slew of US data that arrives on Wednesday, doubled for the Thanksgiving Day holiday on Thursday, Initial Jobless Claims take precedence. Last week's unexpected rise of 31,000 may have been the first notice of a new round of layoffs from the business restrictions imposed in many states or it may be normal variation. If it is seconded by another rise, look for markets to take it out on the dollar.

Markit's Manufacturing and Services PMI for November are expected to confirm that sentiment is marking time--53 in manufacturing from 53.4 in October and 55.5 in services from 56.9.

Durable Goods Orders for October are expected to rise 1% after September's 1.9% increase. Durable Goods Orders ex Transportation should rise 0.4% following 0.9% in September. Nondefense Capital Goods Orders ex aircraft are forecast to add 0.5% in October. They rose 1% in September.

Personal Income in October is expected to gain 0.1% after 0.9% prior and Personal Spending to rise 0.4% following the 1.4% increase in September.

Initial Jobless Claims in the November 20 week are forecast to fall to 725,000 from 742,000. Continuing Claims were 6.372 million in the week of November 13.

Third quarter annualized GDP is expected to be unchanged at 33.1% in its final revision. New Home Sales should rise 1.8% in October to an annual rate of 970,000.

The Personal Consumption Expenditure Price Index rose 0.2% in September and 1.4% on the year. The Core PCE Index is expected to be flat on the month in September and 1.4% on the year.


USD/JPY technical outlook

Even with the steep descent this week the USD/JPY is primed for further losses. The descending channel has not lost its grip on trading.

The Relative Strength Index is at 39.54, down from 46.27 on Monday. The index hit 27.59 on November 6  when the USD/JPY closed at 103.30. The 21-day moving average was crossed on November 13 and at 104.50 is about a figure above the market and fronting resistance at 104.60. The 100-day at 105.64  is coincident with resistance at 105.65. The 200-day at 106.76 is out of consideration. Support at 103.00 is strong though the two lines above are not. Resistance at 104.60 and 105.00 are the mainstays above. 

Resistance: 104.30; 104.60; 105.00; 105.45; 105.65

Support: 103.55 ; 103.30; 103.00.

USD/JPY Weekly Forecast Poll

From last week's uniformly bearish outlook only the immediate forecast at 103.50 remains. The rebound in the one month outlook is minimal. That it is not a turn is confirmed by the neutral reading at one quarter. The USD/JPY awaits a change in the pandemic. 


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