BankForecast.com USD/JPY Weekly Forecast June 6 -10 2016

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Fed June rate hike is currently under huge question considering very disappointing data posted on nonfarm payrolls on Friday. Increase of only 38k is lowest level for more than last five years and implying a question whether labor market is progressing as expected by Fed officials. Market expectations on June/July rate hike has been significantly heated by optimistic view from several Fed officials. In support to that view were also released data on US economy showing modest growth. Unemployment rate for May fell to 4.7%, more than expected, while CPI in April reached 1.1% slowly heading toward targeted 2%. Economic conditions exposed in Fed’s Beige Book revealed modest growth and increase of labor costs across twelve Fed districts. In addition, it has been reported increase in consumer spending and price pressure modestly picking up, which were all implying on potential accommodation for Fed to raise interest rates. How current economic conditions and labor market developments are perceived by Fed officials is going to be seen during next FOMC meeting scheduled for June 14-15. Prior to that, Fed Chair Yellen is holding a speech on Monday, where she might provide some view on current labor market developments.

Delay of sales tax increase has been in focus of Japan officials during previous week. Minister Abe is proposing delay for next two and a half years in light of current slow economic recovery and risks from global slowdown. Quantitative easing imposed by BOJ is still not able to boost inflation toward targeted 2%, putting a burden on Governor Kuroda for next move.  Released data during last week show drop in industrial production to -3.5% on a yearly basis in April while capital spending was modest 4.2% y/y during first quarter. Although increased capital spending is implying on GDP growth, economists are stressing that further decrease in earnings due to high Yen might hurt future capital spending.

The currency pair USD/JPY finished week at level 106.6.

 FUNDAMENTALS WEEKLY UPDATE :  

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

Monday , May 30, 2016 :

  1. Japan Retail Trade: posted figures for April show quite modest improvement to -0.7% on a yearly basis, compared to -1.0% posted during March. Result is better from market consensus at -1.2%. On a monthly basis there has not been any change from previously posted result of 1.5%, while market was expecting modest decrease to -0.6%.
  2. Japan Large Retailers Sales: figures posted for April show modest increase to -0.8% from -1.0% previously released. Figure is also above market consensus at -1.2%.

Tuesday, May 31, 2016 :

  1. Japan Jobless Rate : results for April show no change in jobless rate from 3.2% previously posted. Result was fully in line with market consensus.
  2. Japan Household Spending: results for April show modest improvement in household spending to -0.4% on a yearly basis from -5.3% posted for March. Result is much better from market expectations at -1.3%.
  3. Japan Industrial Production increased in April to 0.3% compared to previous month. Result is significantly better from market consensus at -1.5%. However, on a yearly basis industrial production significantly dropped to -3.5%y/y from 0.2% previously posted. Figure is still better from market consensus of -5.0%y/y.
  4. Japan Small Business Confidence: sentiment in business confidence dropped in May to 45.6 from 47.8 previously posted. Result is also below market consensus at 47.5.
  5. Japan Housing Starts: results for April show modest increase in housing starts to 9.0% on a yearly basis, from 8.4% posted for March. Result is significantly above market consensus at 4.1%.
  6. Japan Construction Orders: results for April show significant drop in construction orders to -16.9% compared to same period last year, from 19.8% posted for March.
  7. US Personal Income: there has been no change in personal income during April from 0.4% previously posted, which was also fully in line with market consensus.
  8. US Personal Spending: posted figures show significant increase in personal spending to 1.0% in April, from 0.0% posted previously. Figure is also better from market consensus at 0.7%.
  9. US Personal Consumption Expenditure Core: there has not been any change in core PCE of 1.6% on a yearly basis from previously posted, while indicator is increased for modest 0.2% compared to previous month.
  10. US Consumer Confidence: index surprisingly dropped to 92.6 in May from 94.7 posted previously and also below market expectation of 96.1.

Wednesday, June 01, 2016 :

  1. Japan Capital Spending: results for first quarter show modest slowdown in Japan capital spending to 4.2% y/y from 8.5% previously posted. Result is significantly better from 2.4% expected by market.
  2. Japan Nikkei Japan PMI MfG: final result for May of 47.7 show almost no change from initially released 47.6.
  3. US ISM Manufacturing: results for May show modest increase in manufacturing sentiment to 51.3 from 50.8 previously posted. Result is also above market consensus at 50.4.

Thursday, June 02, 2016 :

  1. Japan Monetary Base: released data for May show modest slowdown in monetary base to 25.5% on a yearly basis compared to 26.8% posted for April.
  2. Japan Buying Foreign Bonds: posted figure for previous week show quite modest drop in capital inflow to Yen549.4b from Yen684.0b posted for week before.
  3. Japan Buying Foreign Stocks: posted figures show modest decrease in capital inflow to Yen124.9b from Yen182.3b posted for week before.
  4. Japan Consumer Confidence Index: released figures for May show very modest increase of sentiment to 40.9 from 40.8 posted previously. Figure is better from market consensus at 40.1.
  5. ADP Employment Change: released figure for May show modest increase to 173k from 156k previously posted and below market consensus at 175k.
  6. Initial Jobless Claims decreased to 267k during previous week from 268k posted previously. Figure is also better from market estimate of 270k.

Friday, June 03, 2016 :

  1. Japan Labor Cash Earnings: released data for April show significant drop in earnings to 0.3% on a yearly basis, down from 1.5% posted for March. Results is also below market estimate at 0.9%.
  2. Japan Real Cash Earnings: posted data for April show decrease to 0.6% on a yearly basis from 1.6% previously posted.
  3. Japan Nikkei PMI Services: sentiment for services modestly increased during May to 50.4 from 49.3 previously released.
  4. Japan Nikkei PMI Composite: index is modestly increased during May to 49.2 from 48.9 previously released.
  5. US Unemployment rate: released data for May show significant drop of unemployment in the US to 4.7% from 5.0% posted previously. Figure exceeded market consensus at 4.9%.
  6. US Change in Non-farm Payrolls: released data for May show significant drop in non-farm payrolls to 38k from 123k posted previously and significantly below market consensus at 160k.
  7. US Average Hourly Earnings: released data show modest increase in hourly earnings of 0.2% compared to previous month, which is fully in line with market consensus. Previously posted figure was 0.3%.
  8. US Trade Balance: trade deficit in April decreased to $-37.4b from $-40.4b and modestly better from market consensus at $-41.0b.
  9. US ISM Non-Manufacturing Composite:
  10. US Factory Orders: released data show modest increase in factory orders by 1.9% in April from 1.1% posted previously and above market expectation at 0.8%. Excluding transportation, factory orders are up for 0.5%.
  11. US Durable Goods Orders: final release for April show no change from previously posted 3.4%. however, excluding transportation, figure is revised to 0.4% down from previous release of 1.0%.

 

FORECAST FOR THE COMING WEEK

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

Fundmentals 6-10JuneJapan Trade Balance: April data will be released. After significant drop in January of Yen-411.0b, trade balance reverted to surplus, reaching Yen425.2b in February and 927.2b in March.

Japan Gross Domestic Product: second revision for first quarter will be released. After significant drop of -1.1% during fourth quarter of last year, Japan annualized GDP reverted during first quarter to 1.7% as per first estimate.

University of Michigan Confidence: first estimate for June will be released. As of the end of May, consumer confidence reached level of 94.7, which is the highest level since the beginning of this year.

 

 

 

 

 

 

 

USD/JPY Technical Analysis

Currency pair started last week around 111.2 levels, while extremely weak data on US nonfarm payrolls on Friday, pushed USD/JPY to the levels of 106.7 where pair was traded at the beginning of May.

Next support levels are found at 106 down to 105.5 which is long term support levels tested during October 2014 and December 2013.

On the opposite side, inability to break 106 level would lead to trend reversal toward resistance level at 107.8 up to 110 which is long term resistance level.

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

Chart 6-10June

 

 

 

 

 

 

 

 

 

 

 

 

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

Although US fundamentals are showing general economic improvement and modest growth trend, there is still an issue with defining labor market tendency. Friday’s nonfarm payrolls data were extremely huge surprise for market, questioning whether such weak data might suggest that Feds rate hike will be postponed again. On the other side, many economists would agree that Yen is overvalued currency. This puts additional burden on Japan economy and with imposed monetary measures not outputting targeted levels of inflation, there is some probability that BOJ will need to put additional quantitative easing during next BOJ meeting.

For next week I stay neutral on currency pair. After strong move on Friday, reaching level of 106.3, there is a possibility of modest trend correction during next week, with currency pair moving in a range of 106 up to 107.8.

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