BankForecast.com USD/JPY Weekly Forecast May 23-27 2016

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Is FED rate increase ahead in June?  According to April FOMC Meeting minutes, released during last week, such possibility is one of the “flexibility” options at disposal to FED if economic developments point to further growth. Minutes reveled three major economic indicators based on which further strengthening of monetary policy will depend on: employment, inflation and economic output. As discussed many times by FED officials during previous period, reaching full employment is one of the major policy targets. Although it is not still clear what is a level of full employment seen by FED,  previously released data show that unemployment rate has been at level of 5% for several last months, with expectation to modestly drop further.  Inflation figures posted during previous week show further raise of index in April to 1.1% on a yearly basis, increasing possibility that FEDs targeted 2% might be reached by the end of this year. Output of US economy was major concern of several FED members, taking into account relatively modest output of 0.5% in the first quarter. However, there are indications that GDP will catch up during second quarter. Brexit referendum and China currency volatility are recognized by FOMC members as threat to economic outlook. During last few weeks we have seen several FOMC members voicing rate hike during June meeting and following current positive developments on US economy, there is high possibility that June rate hike will actually occur. However, viewed from the point that UK referendum is scheduled week after next FOMC meeting, it opens the possibility that rate increase might be postponed for July.

G-7 meeting was held during last week in Japan. As per Minister Aso previous announcements, strong movements of Yen during last month and potential BOJ intervention on FX market  has been one of the topics of the meeting. US strongly oppose any “competitive devaluation” arguing that central banks should use all monetary measures at disposal to cope with current economic issues, as agreed on latest G-20 meeting.  Yen is also one of currently five currencies included in US watch list of currencies with potential for manipulation aimed to gain unfair trade advantages. Governor Kuroda is recognizing that strong Yen negatively affects currently implemented BOJ measures. In case of further unwilling currency moves, BOJ is ready to react with further easing of monetary policy aimed to achieve targeted inflation level. In this sense, possible BOJ move might occur in June/July, with some of the options including cut of rates further into negative zone and expansion of bond purchasing program. Next BOJ Monetary policy meeting is scheduled for June 15-16, and will be held during almost same time as FOMC meeting.

The currency pair USD/JPY finished week at level 110.12.

FUNDAMENTALS WEEKLY UPDATE :  

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

Monday , May 16, 2016 :

  1. Japan Machine Tool Orders: preliminary results for April show further decrease to -26.4% on a yearly basis, from -21.2% posted previously.
  2. Net Long-Term Treasury International Capital flows in the US increased by $5.5b in March, reaching 78.1b from $72.6b previously posted.

Tuesday, May 17, 2016 :

  1. Japan Industrial Production: forecasted figures for March show expected modest increase in IP to 3.8% on a monthly basis and 0.2% compared to same period of last year.
  2. US Housing Starts: figures posted for April show significant increase of 6.6% compared to previous months -8.8%. Figure is also significantly above market expectation of 3.3%.
  3. US Building Permits: results for April show significant increase to 3.6% compared to previous months -8.6%, however, figure is modestly below market consensus at 5.5%.
  4. US Consumer Price Index: US inflation is showing further increase trend, reaching 0.4% in April compared to previous month of 0.1%, leading to yearly inflation to 1.1% from 0.9% posted previously. Core inflation was quite modestly down in April to 2.1% on a yearly basis from 2.2% posted in March. Released yearly CPI figures were fully in line with market expectations.
  5. US Average Weekly Earnings: posted figures for April show modest decrease in weekly earnings to 0.2% on a yearly basis, from 1.1% posted for previous month.
  6. US Industrial Production: April figures show significant increase in IP to 0.7% from -0.9% posted previously. Figure was also significantly above market expectation at 0.3%.

Wednesday, May 18, 2016 :

  1. Japan Gross Domestic Product: released result for first quarter GDP show significant increase in output of Japan economy. Posted annualized GDP is 1.7% from -1.7% posted previously and significantly above market consensus at 0.3%. GDP on a quarterly basis is up to 0.4% from -0.4% for previous quarter and above market expectation of 0.1%. Japan GDP in nominal terms was 0.5% in 1Q, compared to -0.2% for previous quarter.

Thursday, May 19, 2016 :

  1. Japan Housing Loans: posted figures for first quarter show modest decrease in housing loans to 1.9% on a yearly basis from 2.2% posted previously.
  2. Japan Machine Orders: figures show significant increase in orders to 5.5% on a monthly basis from -9.2% posted previously, bringing total increase to 3.2% on a yearly basis, from -0.7% previously released. Both figures has been significantly above market consensus of -2.0% on a monthly, and 0.8% on a yearly basis.
  3. Japan Buying Foreign Bonds ( May 13th ): posted figures show significant capital inflow of Yen1121.8b compared to Yen270.3b posted for previous week.
  4. Japan Buying Foreign Stock ( May 13th ): posted figures show quite modest inflow of Yen152.1b compared to Yen17.4.b posted for previous week.
  5. Philadelphia Fed Manufacturing Index unexpectedly dropped to -1.8 for May. Result is lower from previously posted -1.6, and well below market expectations at 3.5.
  6. US Leading Indicators: results for April show significant increase in index to 0.6% from 0.2% posted previously. Result is also above market expectation of 0.4%.

Friday, May 20, 2016 :

  1. US Existing Home Sales: released results for April show modest increase in home sales to 1.7% compared to previous month 5.1%. In nominal figures existing home sales reached 5.45m from 5.33m posted previously. Posted figures are above market expectation of 5.40m or 1.3% increase on a monthly basis.

 FORECAST FOR THE COMING WEEK

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

Fundamentals 23-27 May

US New Home Sales: results for April will be posted showing change on a monthly basis. After strong results posted during last week on US existing home sales, market is expecting to see similar developments also with new home sales, as a sign of general improvement of US economic sentiment and real-estate market. Market consensus is at 2.0% monthly change from -1.5% previously posted.

US Advance Goods Trade Balance:  results for April will be released showing changes in trade deficit of goods from previously posted $-57b. Market is expecting further increase in deficit to $-59.4b.

US Initial Jobless Claims: after significant increase in US jobless claims, reaching 294K, at beginning of May, during previous week claims returned to level of 278K. Market is expecting to see this week further relaxation in jobless claims to 273K.

US Durable Goods Orders: results for April will be posted. Market is expecting further slowdown in orders to 0.4% from 0.8% posted for March.

US Annualized Gross Domestic Product: preliminary results for first quarter will be posted showing output of US economy. GDP for previous quarter was standing at 0.5%, while market is expecting to see annualized GDP at 0.9%.

Japan National Consumer Price Index:  extremely important indicator to watch during this period taking into account implemented monetary measures to cope with deflation trend in Japan. Any surprises in CPI might trigger significant market reaction. Japan CPI dropped in March to -0.1% on a yearly basis, while forecasted figure for April is 0.0%.

 

 

USD/JPY Technical Analysis

Currency pair was trading during last week between 108 – 110 levels, finishing week at level of 110.12. Last three days of previous week USD/JPY is testing long term resistance level at 110, currently without strength to break it.

Break of 110 resistance would lead to testing next short term resistance levels at 110.7 up to 112.

On the other side, break from 110 level would lead to testing next short term support at 109.5, 108, 107.8 and 106 levels, down to long term support  105.5, tested ruing October 2014 and December 2013.

Relative Strength Index over 14-day period is at levels above 50 still not clearly indicating trend reversal.

 

Graph 23-27 May

 

 

 

 

 

 

 

 

 

 

 

 

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.
  • 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.
  • Deutsche bank said it is much more likely for USD/JPY to fall below 110 in the next several months : Bank Forecast.

 

For next week I am bullish on USD/JPY

At least for the moment we might be to some extent sure that we will not see BOJ intervention on FX market. It has been discussed on G-7 meeting that competitive devaluations should be avoided and that central banks should instead use all monetary measures at disposal to achieve set monetary targets. In this sense, we have seen Governor Kuroda noting that BOJ will react with further monetary easing in case of further strengthening of Yen. This statement implies that there might be possibility of next BOJ move to occur during Jun or July meetings. Released April FOMC meeting minutes revealed that FOMC members left a flexibility option for June rate increase. With several FOMC members supporting June rate hike and released economic data showing improvements in segment of inflation, labor and modest growth, there is  huge probability that rate increase might happen in June, eventually July due to Brexit.

Since the beginning of May currency pair is moving in a clear channel. Last three days of previous week USD/JPY was testing long term resistance level at 110. Break of 110 resistance would lead to testing next short term resistance levels at 110.7 up to 112, while on the other side, support levels are at 109.6 and 108. Although next week Japan CPI figures are going to be released, that might trigger some market reaction, I am still not sure whether market have strength to break the channel. In this sense, during next week I expect to see USD/JPY  moving between 109.5 and 111.5 levels.

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