BankForecast.com USD/JPY Weekly Forecast June 13-17 2016

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Is Fed rate increase ahead in June? During previous weeks several FOMC voting members heated market expectations by openly supporting June or July rate hike. Although US economy is showing signs of recovery, there are still some weaknesses and risks that might influence rate increase decision to be postponed for July or even September meeting. In an interview held on Monday, Fed Chair Yellen noted that gradual rate increase might occur only if conditions are met. Aside from economic growth, other two Fed policy targets are set to be reaching full employment and inflation of 2% as of year-end. With CPI reaching 1.1% in April and increase in wages and spending, there is high probability that 2% inflation target will be reached. On the other side, labor market showed some weaknesses during last week, with non-farm payrolls reaching only 38k during May, as per released data. Fed Chair Yellen found those data “disappointing”. Although she see other labor market data more positive, still noting that they need careful attention. Whether US economic developments are supporting further strengthening of monetary policy at this moment is up to be seen on Wednesday. In addition, it must also be accounted that Brexit referendum is recognized as one of the risks for US economy during last FOMC meeting and it might be perceived as one of the potential reasons, among others, for possible rate increase postponing.

BOJ policy meeting will be held on Thursday this week. Many economists are expecting next move from Governor Kuroda, , considering that already employed measures are not outputting expected results on boosting Japan economy and bringing inflation to 2% target.  Further measures are expected mostly within asset purchase program and much less on further cut of interest rates. During April meeting BOJ did not made any changes to its quantitative easing program, noting that monetary policy measures need time to fully reveal in the economy. As per posted results, output of Japan economy during first quarter was 0.5%q/q, while inflation reached -0.3% y/y during April, going for second month into negative territory and away from BOJ`s target.

The currency pair USD/JPY finished week at level 106.95.

FUNDAMENTALS WEEKLY UPDATE :  

Short review of major fundamentals released during previous week is following:

Tuesday, June 7, 2016 :

  • Japan Leading Index: preliminary results for April show modest increase in index to 100.5, up from 99.3 posted previously. Released data are quite modestly lower from market estimate at 100.6.
  • Japan Coincident Index: preliminary results for April show modest increase of index to 112.2, up from 111.1 released previously, but below market estimate of 112.9.
  • US Non-farm Productivity: final data for first quarter show modest improvement to -0.6% from initially estimated -1.0%. Released figure was fully in line with market estimate.
  • US Unit Labor Costs: final data for first quarter show increase in labor cost of 4.5% from 4.1% initially estimated. Figure is also higher from market estimate of 4.0%.

Wednesday, June 8, 2016 :

  • Japan Current Account: released data show significant decrease to Yen1878.5b in April, down fromYen2980.4b posted for March, and also below market expectations at Yen2308.8b.
  • Japan Trade Balance – BOP Basis: released data show significant drop in trade balance to Yen697.1b, down from Yen927.2b posted for March, and also below market consensus at Yen919.0b.
  • Japan Gross Domestic Product: final released figure show modest increase in Japan GDP for first quarter to 0.5% from 0.4% initially estimated. On a yearly basis, final estimate is also improved to 1.9%, from 1.7% initially released. Figures were fully in line with market consensus.
  • Japan Bank Lending: there has not been changes in indicator during May, from 2.2% on a yearly basis, previously posted.
  • Japan Bankruptcies: released data show modest increase in bankruptcies to -7.32% on a yearly basis, up from -7.08% previously released.

Thursday, June 9, 2016 :

  • Japan Machine Orders: released data show unexpected drop in machine orders by -11.0% on a monthly basis, leading to fall of -8.2% on a yearly basis during April. Both figures were significantly below market consensus at -3.0% m/m and -1.8% y/y.
  • Japan Buying Foreign Bonds: posted figure for previous week show modest increase of capital inflow to Yen893.9b from Yen549.4b posted for week before.
  • Japan Buying Foreign Stocks: posted figures show significant decrease of capital inflow to Yen35.2b from Yen124.9b posted for week before.
  • Japan Machine Tool Orders: preliminary results for May show drop of -25.0% on a yearly basis, modestly better form -26.3% posted previously.
  • US Initial Jobless Claims: released data show further decrease in jobless claims to 264k during previous week, down from 268k posted previously, and better from market consensus at 270k.
  • US Wholesale Inventories: released data show modest increase in inventories to 0.6% during April, higher than market consensus at 0.1%.

Friday, June 10, 2016 :

  • Japan Tertiary Industry Index: released data show significant increase of 1.4% on a monthly basis during April, and above market estimate of 0.6%.
  • US University of Michigan Confidence: preliminary results for June show quite modest decrease of index to 94.3 from 94.7 posted previously. Index is still above market estimate of 94.0.

 

FORECAST FOR THE COMING WEEK

Below are some of the significant indicators to watch during next week:

Fundamentals 13-17JuneWeek ahead is going to be quite interesting for FX market. It starts on Wednesday when FOMC members  will decide on its interest rates. During following day BOJ will hold policy meeting also deciding on further monetary stimulus and rate levels.

Japan Industrial Production: final April results will be released. In line with general slowdown of Japan economy, industrial production is showing down trend, reaching -3.5% on a yearly basis as per April preliminary estimate. On a monthly basis initially estimated April IP was at 0.3%.

US Retail Sales: results for May will be released. After quite modest beginning of the year, US retail sales strongly rebound reaching 1.3% increase on a monthly basis during April. At the same time, retail sales excluding autos were increased for 0.8% on a monthly basis.  Market is expecting continuing trend with increase of 0.4% during May.

US Industrial Production: results for May will be released. After relatively strong output of US industrial production during January with 0.9% increase on a monthly basis, February and March  brought some slowdown with -0.5% m/m and -0.6% on a monthly basis. During April, IP was increased for 0.7%m/m, however, market is expecting to see some modest slowdown during May of -0.1%m/m.

US Current Account Balance: results for first quarter will be released. As of the end of last year current account deficit was standing at $-125.3b.

US Consumer Price Index: results for May will be posted. As of beginning of second quarter of this year, US inflation is modestly picking up reaching 0.4% on  a monthly basis during April, bringing it to 1.1% compared to same period of last year. Considering posted increase in wages and other labor market developments, market is expecting US inflation to modestly pick up toward Feds target of 2% till the end of this year. However, current market CPI estimate for May stands at 0.3% on a monthly and 1.1% on a yearly basis.

US NAHB Housing Market Index: results for June will be released showing sentiment on sales of new homes at present and within six months time. Since February index is standing at 58, hence market is not expecting any change in index for June.

 

USD/JPY Technical Analysis

During previous week currency pair was traded between levels of 107.9 down to 106.2. Both short term resistance at 107.8 and short term support level at 106.2 has been tested.

Break of  106.2 short term support would lead currency pair to next level  at 105.5 which is long term support level tested during October 2014 and December 2013.

On the opposite side, next resistance levels are at 107.8, 109.2, 109.6 up to 110 which is long term resistance level tested during October 2014.

Relative Strength Index over 14-day period is at levels above 30 still not clearly indicating trend reversal.

Chart 13-17June

USD/JPY daily graph with support and resistance lines, RSI and MA

 

USD/JPY MARKET FORECAST

  • Scotia Bank keeps bullish view on currency pair forecasting level of 118 as of the year end and 112 for end of second quarter Scotia Bank.
  • SEB AB: “we expect the yen to fall back again” Bloomberg
  • Goldman Sachs Group: “We are very bearish the yen” Bloomberg
  • United Overseas Bank states that break below 109.8 would indicate end of bullish trend. Bank Forecast
  • Analysts at Barclays bank are expecting to see currency pair down to levels of 100 in next quarters : Bank Forecast.

 

For next week I am neutral on USD/JPY

With two central banks holding policy meetings within same week, some increased volatility on FX markets might be expected. FOMC member will decide on further rate increase on Wednesday. Although US economy is on evident growth path, there are exposed some weaknesses in labor market. In addition, Brexit referendum is scheduled for week after June FOMC meeting, increasing probability that rate increase might be postponed for July or even September meetings. If Fed vote YES, than there is possibility for currency pair to move back to levels of above 110. If decision is NO, there might be seen shift below 106 levels. On the other side, market is expecting to see some further stimulus from BOJ, not so much within further drop in interest rates, but within asset purchase program. If further measures are imposed by BOJ, then it might be expected for currency pair to move to new levels, hence, I am staying neutral on currency pair for the next week, waiting for next moves from both Fed and BOJ.

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