BankForecast.com USD/JPY Weekly Forecast June 27 – July 1 2016

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Britons voted to leave European Union which triggered financial turmoil affecting every asset traded on financial markets. Japan currency, perceived as “safe haven” currency gained significantly in value, reaching level of 102 against dollar. Governor Kuroda expressed readiness to provide liquidity to central banks if necessary to stabilize markets. Global economic slowdown including historically low level of oil prices, already affected Japan economy, while post- Brexit developments might put additional burden on BOJ, as well as on other central banks in developed countries.

Minutes of the April BOJ Monetary Policy meeting had been released during previous week. There has been noted expectation for exports and industrial production to remain flat due to slowdown in emerging economies. Inflation level of 0.0%,affected by energy prices decline, would remain “for time being” at same level. Timing of reaching 2% inflation level is projected for Y2017, which would be supported by rise in crude oil. However, some BOJ members pointed out that previous inflation trend has been supported by Yen depreciation, but  taking into account recent strengthening of Yen versus US dollar, inflation target might be jeopardized. Minutes also revealed that there is no full consensus on pursuing further negative rate policy as side effects are neglected, as well as negative influence on financial market functioning. Decision on negative interest rates had been adopted with 2 votes against who also argued that it should not be applied on banks obligatory reserve funds.

Holding semiannually testimony on monetary policy to Senate Banking Panel, Fed Chair Yellen provided some valuable insight on US economic developments and potential future policy movements. Although economy is moving in positive direction at moderate pace, still relatively weak labor data are defined as “transitory” considering increase in household spending, with expectations on its further improvement. Developments will be in further closely watched by Fed. As inflation is moving toward targeted 2% level, Fed might react with rate increase if targeted level is to be breached in the future period. Brexit is recognized as significant risk as well as China slowdown and in this sense Feds projections might not be reliable blueprint for future Fed actions, not excluding option of even rate decrease if conditions require such move. Previously, during last week, Minneapolis Fed Chief Kashkari noted that Britons exit would have “moderate direct effect”, noting also that Fed might use all policy measure at disposal to diminish negative effects on economy.

New York FED lowered projections for US gross domestic product to annualized rate of 2.1%, down from 2.4% projected previously, mainly as result of drop in manufacturing figures recently posted, while retail sales and housing data contributed positively on projection. At the same time Atlanta FED GDPNow forecast figures, based on econometric model, show real GDP growth for second quarter of this year of 2.8%. However, it should be noted that Brexit effects has not been included in projection models. St. Louis Fed Chief Bullard noted on Friday his view that given current state of US economy, most appropriate Fed rate would be 0.63%. As his expectations are on side of neutral economic growth of US economy for future period from where it stands now, he is arguing that only one rate increase would be needed for period of next two and half years.

The currency pair USD/JPY finished week at level 102.01.

 

FUNDAMENTALS WEEKLY UPDATE :  

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

Monday, June 20, 2016 :

  • Japan merchandise Trade Balance: released data for May show significant drop in Japan trade balance surplus to Yen40.7b, from Yen823.5b posted for previous month. Released data are also lower from market estimate of Yen70.0b. Exports are down by -11.3% y/y, while imports decreased by -13.8%.

Tuesday, June 21, 2016 :

  • Japan All Industry Activity Index: released data for April show modest improvement in industry sentiment of 1.3% on a monthly basis, modestly better from market consensus at 1.2%.

Wednesday, June 22, 2016 :

  • US MBA Mortgage Applications: data for reporting week of June 17th show modest increase in applications of 2.9%, increased from -2.4% posted for week before.
  • US House Price Index: released data for April show quite modest increase in house prices of 0.2% on a monthly basis, modestly below market consensus of 0.6%. During March, house prices were up by 0.7%.
  • US Existing Home Sales reached 5.53m during May, modestly above 5.43m posted for previous month, but below market estimate at 5.55m. Existing home sales are increased by 1.8% in May, which is further increase from 1.3% posted previously.

Thursday, June 23, 2016 :

  • Japan Buying Foreign Bonds: posted figure for previous week show modest decrease of capital inflow to Yen457.7b from Yen867.9b posted for week before
  • Japan Buying Foreign Stocks: posted figures show further decrease of capital inflow to Yen72.4b from Yen129.5b posted for week before.
  • Japan Nikkei PMI Mfg: released preliminary results for June show quite modest increase in sentiment to 47.8 points from 47.7 posted previously.
  • Japan Leading Index: final figures for April show modest decrease in index reaching 100.0, down from 100.5 posted previously.
  • US Initial Jobless Claims unexpectedly fell to 259k during previous week, which is significant decrease from 277k posted previously and also below market consensus at 270k. Continuing claims reached 2142k, down from 2162k posted for week before and below market estimate at 2150k.
  • US Markit Manufacturing PMI: preliminary results for June show modest increase in sentiment to 51.4 points, up from 50.7 posted previously and above market consensus at 50.9.
  • US New Home Sales dropped during May to 551k or -6.0% on a monthly basis. Such move was expected considering significant growth of 16.6% m/m above every expectations. May drop was below market estimate of -9.5%.
  • US Leading Indicators: released data for May show drop in US economic activity by -0.2%, significantly below 0.6% posted for previous month and market expectation at 0.1%.

Friday, June 24, 2016 :

  • US Durable Goods Orders: preliminary results for May show decrease in durables of -2.2%, down from 3.4% posted for previously month. Released figure is significantly below market consensus at -0.5%. Excluding transportation, durables are decreased to -0.3%, down from 0.5% posted previously.
  • University of Michigan Confidence: released final data for June show modestly decreased consumer sentiment to 93.5 points, down from 94.3 posted initially.

FORECAST FOR THE COMING WEEK

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

Fundamentals 27Jun-01JulUS Goods Trade Balance: results for May will be released. US started this year with further increase in trade deficit reaching $-62.23b in January. However, during following months, trade deficit has been modestly decreased to $-57.53b during April. Current market expectations are on side of modest increase of deficit during May to $-59.0b.

US Gross Domestic Product: third estimate for first quarter will be released. Initial estimate of 0.5%q/q has been improved during second release, reaching 0.8%q/q. Market is estimating that final GDP figure for first quarter will reach 1.0%q/q. During last quarter of last year GDP was standing at 1.4%q/q.

Japan Industrial Production:  preliminary results for May will be released. After significant drop of -5.2%m/m in February, Japan industrial output reverted to positive side during following months with 3.8% increase in March and 0.5% in April. However, market current estimates show modest decrease in IP to -0.1%m/m. On a yearly basis, industrial output was lower for -3.3% in April compared to same period of previous year. Market estimates that Japan IP will increase to 1.8%y/y in May.

Japan National Consumer Price Index: results for May will be released. This is currently one of few very  important indicators to watch on Japan economy showing efficiency of extensive quantitative easing program conducted by BOJ. Deflation reversal is one of targets of that program, and during previous period it did not show positive output, considering that inflation dropped again into negative territory reaching -0.3% y/y during April. Currently, market is expecting further drop in inflation to -0.5%y/y.

Tankan Report: issued by Bank of Japan, Tankan index provides valuable information on Japan economy and is closely watched by market. Second quarter results will be posted on Friday. Tankan Large All Industry CapEx Index dropped by -0.9% q/q during first quarter while market is estimating increase of 5.0% of industry capital expenditure during second quarter. Large Manufacturers index dropped to 6 points during first quarter, while market estimates its further drop to 4 points in 2Q. Large Manufacturing Outlook reached 3 points in 1Q, down from 7 points during 4Q2015. Market is not expecting any change in this index during 2Q. Non-manufacturing index modestly dropped during 1Q to 22 points from 25 in 4Q2015, while market is expecting its further decrease to 20 points in 2Q.

 

 

 

 

 

USD/JPY Technical Analysis

Brexit marked previous week dragging financial markets into another turmoil. As Yen is still perceived as safe haven currency, its value has been significantly increased to the level of 98.8 against US dollar after initial referendum results were announced, however currency pair finished week at level of 102.

Levels of 102.0 has been previously traded during year 2014, with significant support level standing at 100.8 during this period of time, with 101.5 in between.

On the opposite side, next resistance levels are at 103.8 tested during May 2013, and  104.08 also tested previously during April 2014. Both levels represents long term support level, followed with 105.5 tested during October 2014 and December 2013.

Relative Strength Index over 14-day period is at levels around 30 witch might imply on trend reversal with short period of time.

Chart 27Jun-01Jul

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 more on bullish side of USD/JPY

Markets are currently seeking for new equilibrium, and whether currency pair will continue to trade at this levels of 102 is to been seen during next couple of days when markets calm down from initial shock. Japanese Yen had been for many years perceived as safe haven currency by markets and current level of 102 is not reflecting actual fundamentals of US and Japan economies. In this sense, I am much more on bullish side for next week , with possibility that market will test 103 or 104 levels.

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