BankForecast.com USD/JPY Weekly Forecast June 20-24 2016

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New USD/JPY lows for this year has been reached during previous week, when currency pair tested level of 103.5 after BOJ rate decision.  When currency pair was traded around 107-108 levels, Minister Aso was mentioning market intervention  considering that strong Yen is hurting Japan economy and especially jeopardizing heavy monetary stimulus imposed by BOJ aimed to cope with deflation and slowdown in economic growth. However, during G7 meeting held in May, leaders of seven strongest world economies agreed that competitive devaluations should be avoided by central banks. During previous week both FED and BOJ left current monetary policy unchanged, which pushed Japan currency higher against dollar. Although there are opinions that Yen is strongly overvalued, market is still perceiving Yen as safe haven currency due Japan export orientation and strong trade surplus during many years. Due to this reason, Brexit vote to leave EU might put additional pressure on Yen, and in this sense Governor Kuroda noted possibility on introduction of further stimulus measures if necessary, however, stressing that monetary policy will not be created based on FX market moves, but exclusively based on fundamentals. He is also expecting inflation to move as per BOJ projections, reaching targeted 2% till March Y2018.

Once again Fed had left interest rates unchanged, as expected, as there are some mixed figures on US economy, followed with risks related to Brexit referendum, which is scheduled for next week. Fed Chair Yellen was confident regarding inflation levels reaching targeted 2%, and in this sense, providing some accommodation for Fed to react during meetings in July or September. However, on a long run Fed is quite uncertain where interest rates are heading as developed economies might be stuck in environment of low interest rates for a long period of time after Y2008 financial crisis. Recently posted figures on employment are sending mixed signals on recovery of labor market and adding some possibility that Fed target on full employment might not be fully accomplished. Yellen is expecting for jobs to slow and noted that recent payroll data has been low. British referendum to leave EU is adding additional risks for economy, as many companies, mostly within financial industry used London centrals to enter rest of Europe.

The currency pair USD/JPY finished week at level 104.04.

FUNDAMENTALS WEEKLY UPDATE :  

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

Tuesday, June 14, 2016 :

  • Japan Industrial Production: final April results show modest increase in Japan industrial production of 0.5% on a monthly basis, up from 0.3% posted previously. Posted results on a yearly basis show modestly lower drop of -3.3%y/y from -3.5% initially released.
  • Japan Capacity Utilization: released data for April show drop of -1.0% on a monthly basis. Capacity utilization during March was standing at 3.2%.
  • US Retail Sales: US Retail Sales: during May retail sales were up for 0.5% on a monthly basis, above market expectation at 0.3%. Excluding autos, retail sales increased by 0.4% on a monthly basis, slightly below 0.8% posted previously, but fully in line with market consensus.
  • US Business Inventories: released data for April show modest increase in business inventories of 0.1%, modestly below market estimate of 0.2%.

Wednesday, June 15, 2016 :

  • Japan Machine Tool Orders: released final results for May show modest relaxation in downtrend with machine orders reaching -24.7% on a yearly basis, compared to -25.0% initially posted.
  • US Producer Price Index: released data for May show 0.4% increase in producer prices on a monthly basis, better from market expectations at 0.3%. Compared to same period of last year, producer prices are decreased for -0.1%, down from 0.0% posted previously. Excluding food and energy, prices are increased for 0.3% m/m above market consensus at 0.1%m/m.
  • US Industrial Production: released data show modest slowdown in US industrial output of -0.4% on a monthly basis, below market consensus of -0.2%m/m.
  • US Capacity Utilization: data for May show modest decrease of capacity utilization to 74.9% down from 75.3% posted previously and below market consensus at 75.2%.
  • FOMC Rate: no change in rate from previous 0.50%.
  • FOMC Rate Lower Bound: no change in rate from previous 0.25%
  • US Net Long term TIC Flows: released data for April show drop in Net Long-Term Treasury International Capital flows of $-79.6b.

Thursday, June 16, 2016 :

  • Japan Buying Foreign Bonds: posted figure for previous week show almost flat capital inflow of Yen867.8b compared to Yen894.0b posted for week before.
  • Japan Buying Foreign Stocks: posted figures show significant increase of capital inflow to Yen129.6b from Yen35.2b posted for week before.
  • BOJ Annual Rise in Monetary Base: no change from previous Yen80t.
  • BOJ Basic Balance Rate: no change from previous 0.10%
  • BOJ Macro Add-On Balance Rate: no change from previous 0.00%
  • BOJ Policy Rate: no change from previous -0.10%
  • US Current Account Balance significantly increased during first quarter reaching $-124.7b, still below market consensus at $-125.0b. Revised figure for last quarter of previous year is $-113.4b.
  • US Initial Jobless Claims increased during previous week reaching 277k, up from 264k posted previously, and above market estimate at 270k.
  • US Consumer Price Index: released data for May show modest increase of 0.2% on a monthly basis, below market consensus of 0.3%. For the same period yearly inflation reached 1.0% modestly below 1.1% posted previously which was also market expectation. Core inflation was up for 0.2% on a monthly basis, reaching 2.2% compared to same period of last year, which is increase from 2.1%y/y posted previously.
  • National
  • Association of Home Builders Housing Market Index: released data for June show increased sentiment on sales of new homes at present and within six months time, with index reaching 60, up from 58 posted previously, and above market consensus at 59.

Friday, June 17, 2016 :

  • US Housing Starts: released data for May show modest decrease of -0.3% on a monthly basis, significantly better from -1.9% estimated by market. During April housing starts were increased by 4.9% m/m.

 

FORECAST FOR THE COMING WEEK

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

Fundamentals 20-24JunFed Chair Yellen will hold semi-annual testimony on monetary policy to Senate Banking Panel on Tuesday, providing some further insight on future monetary policy  decisions and current state of US economy as discussed on latest FOMC meeting held during last week.

Japan Merchandise Trade Balance: results for May will be posted. After significant drop in January to Yen-645.9b, Japan trade balance returned to surplus territory with Yen242.8b during February, Yen755.0b in March and Yen823.5b during April. This is one of important indicators to watch for Japan economy considering its export orientation.

US Existing Home Sales: results for May will be released. During second quarter of this year, US housing market generally rebound with some strong figures released on home sales. After strong drop in February of -7.1% on a monthly basis, existing home sales market rebound by 5.1%m/m in March followed with 1.7% in April. Market is expecting continuing positive trend with 1.8% m/m increase during May.

US New Home Sales: data for May will be released showing changes in new home sales  from previous month. Although sales figures has been relatively weak since the beginning of this year, increase of 16.6% during April has beaten all expectations. However, for May market is expecting to see some relaxation after April figures and drop of -8.6%.

US Durable Goods Orders: results for May will be released. Strong investment in durable goods of 4.9%m/m in January has been partially diminished with drop of -2.8%m/m in February. However, 3.4%m/m during April beaten every market expectation. Market is estimating some modest slowdown in durable goods orders of -1.0%m/m in May.

 USD/JPY Technical Analysis

During previous week currency pair was traded between levels of 106.82 down to 103.5, supported by both BOJ and FED monetary policy decisions, finishing week at level of 104.04. Two year low of currency pair has been reached.

Level of 104.08 has also been tested previously during April 2014 and represents long term support level. Break of 104.08 would lead further to next long term supports found at 103.8, 101.5 and 100.86.

On the opposite side, next resistance levels are at 105.5 which is long term resistance, up to 106 and 107.8.

Relative Strength Index over 14-day period is at levels around 27 indicating that oversold side is reached and possible trend reversal.

Graph 20-24Jun

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

 

USD/JPY MARKET FORECAST

  • Barclays Bank sees move below 105.5 would lead to 100.7. Bank Forecast
  • Morgan Stanley sees USD/JPY fall down to 100. Bank 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.
  • 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

 

For next week I am neutral on USD/JPY

During June we have seen both FED and BOJ taking very cautious approach when changes in monetary policy are in question. In light of forthcoming Brexit referendum, central banks decided to postpone potential new measures for July meeting. Although full scale of consequences if Britons vote to leave cannot be fully predicted,  it might be expected that US financial sector with business in the UK would go through  some sort of business restructuring, while Yen will continue to rise as Japan currency is still perceived as safe haven currency. On the other side, if vote is no, then I expect currency pair to move in a range of 104 up to 105.5 during next week . However, due to high degree of uncertainty surrounding British referendum, I will stay neutral during next week.

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