USD/JPY Weekly Forecast: USD weakness spread to dollar/yen

• USD/JPY falls and breaks support at 106.50 and 106.00.
• Worsening US-China relations helps to drive markets to the yen.
• A small rise in US initial jobless claims excited fears of jobs losses in July.
• Falling Treasury rates and economic uncertainty undermine dollar.

Until Friday the USD/JPY did not participate in the European flight from the dollar that has brought the united currency over 1.1600 for the first time since October 2018. The euro advantages are specific, a stable pandemic outlook and a €750 billion European Union economic recovery fund to run through 2023.

The dollar/yen had remained penned in its six week 106.50-107.50 range that has seen only two days of action outside that band since June 11 until the Tokyo open on Friday. The pair fell from 106.82 to 106.52 in a 15 minute plunge taking out the week's low of 106.69 and and then continuing to 106.17 through support at 106.50 before recovering to the 106.30s in Europe. Once 106.50 was crossed the market traded progressively lower with New York continuing through 106.00 to a low of 105.78 before a slight bounce to 105.93. 

Improving US employment numbers in May and June and better than expected purchasing managers indexes have been overshadowed by unemployment claims which have yet to drop below 1.3 million and rose to 1.416 million in the latest July 17 week.  Behind the concern for the US labor market is the wider worry that rising Covid cases in the South and West will inevitably hamper if not force a retreat in the economic recovery.

Treasury rates have drifted lower over the past week reflecting the apparent weakness in the US economy, with the 10-year sliding from a 0.628% close on July 17 to 0.579% on Thursday and 0.586% on Friday.  The all-time low in this benchmark rate was 0.498% on March 9 at the height of the Coronavirus market panic.   The 2-year yield has been relatively stable in July moving between closing rates of 0.165% and 0.143% finishing at 0.147 at the week end.

The US ordered the Chinese consulate in Houston closed in the latest incident in the downhill slide of relations between the world’s two largest economies. Relations have steadily worsened as the coronavirus, which originated in China’s Wuhan province, has swept the world and each side has accused the other of various complicities in its spread.

Japanese data was uneventful and provided little new information.  Imports for July were down 14.4% on the year slightly less than the 16.8% forecast and much less than the 26.2% plunge in June. It was however, the 14^th monthly decline in a row.  Annual exports fell 26.2%, more than the -24.9% predictions though a bit less than the 28.3% drop in May. They are down 19 straight months.

Inflation remained nonexistent.  On the year in June national CPI registered 0.1% as it has since April. Core CPI was 0.4% for 12 months as it was in May.

The Jibun Bank preliminary manufacturing PMI for July was better than forecast at 42.6 over 39.6 and May’s 40.1 but the 15^th month of contraction was no cause for cheer.

USD/JPY outlook

Dollar weakness had been most pronounced against the euro and the Swiss franc but the greenback has now slipped to pre-pandemic weakness against all the majors--aussi, kiwi, yen--except the sterling and Canadian dollar.  Sterling is restrained by its Brexit problem, and the loonie by its close ties to the questionable US economy and the low price of oil.

If the economy stagnation from the viral spread in the US increases and especially if the labor market reverses the USD/JPY will continue to follow the dollar down, even though the Japanese economy gives no sign of recovery.  It is the path of least resistance.

Japanese statistics July 20-July 24

Monday

Imports in July fell 14.4% following the May 26.2% decline, -16.8% was forecast.  Exports dropped 26.2% after decreasing 28.3% in May, -24.9% was the consensus forecast.

Tuesday

National CPI was 0.1% on the year in June, above its 0% predictions but as in June.  Core CPI came in at 0.4% as in May slightly over the 0.3% forecast.

Wednesday

The Jibun Bank preliminary manufacturing PMI rose to 42.6 in July over its 39.6% projection and the May level at 40.1.

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US statistics July 20-July 24

Wednesday

Existing home sales rose 20.7% in June to a 4.72 million annual rate missing the estimates of 24.5% and 4.78 million. May’s numbers were -9.7% and 3.91 million.

Thursday

Initial jobless claims rose unexpectedly to 1.416 million in the July 17 week. They had been predicted to remain at 1.3 million. Continuing claims dropped to 16.197 million from 17.304 million, 17.067 million had been forecast.

Friday

IHS Markit’s manufacturing PMI rose to 51.5 as expected in July from 49.8 in June. Services PMI climbed to 51 as forecast from 47.9 in June

New home sales rose 13.8% in June far more than the 4% prediction to an annual rate of 776,000. May's revised increase  was 19.8% and  a rate of 682,000.

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Japan statistics July 27-July 31

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US statistics July 27-July 31

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USD/JPY technical outlook

The pair crossed the 106.50 support line in Tokyo on Friday taking out the week's low of 106.69 in a 15 minute plunge at the open and then continuing to 106.17 before recovering to the 106.30s in Europe.  While the move was small in points and did not engender a stop run lower it  was significant, the 106.50 line had held for more than two months and once crossed there was no return. The New York market continued lower crossing the 106.00 line in mid-morning and as at 106.50, once broken there was no rebound through the old support. 

The relative strength index had been falling since Wednesday and at 34.43 is at its lowest point since March 12.The sharp tilt lower is indicative of further weakness. Moving averages reflect the long period of stasis between 106.50 and 107.50 and are now well above the market. The 21-day average is the lowest was crossed on Tuesday at 107.23. At  107.19 on Friday the 21-day line supports resistance at 107.30. The 100-day line at 107.54 supports resistance at 107.50 and the 200-day at 108.34  backs-up 108.40.

Support is limited as the deep drop to 101.18 in early March and rapid recovery left little in the way of reference trading levels. Prior trading below 106.00 took place in August and September 2019. 

Resistance: 107.30; 107.50; 107.80, 108.00; 108.40; 108.70

Support:105.60; 105.35; 105.00; 104.55

USD/JPY sentiment poll

Friday's fall through long established supports, though it had to have been expected given the anti-dollar pressure from all the major pairs, has not changed the overall forecast outlook which is bullish through three time periods. One reason is that the concern for the US labor market remains speculative based only on the initial claims figures. Another is that although the EU has passed a recovery package, its actual effect on the moribund and historically slow-reacting European economies is  likely to be delayed. Finally the Japanese economy is showing no signs of recovery and if the US-China acrimony increases it will place a drag on Japan's economy whatever the safety status of the yen in Asia.