BankForecast.com USD/JPY Weekly Forecast May 30- June 03 2016

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As June FOMC meeting is approaching market expectations on rate increase decision are increasing. Such sentiment is supported by several Fed members commenting potential future FOMC decision. During last week St. Louis Chief Bullard expressed his view that positive current developments on labor market might influence future raise in inflation, and in this sense, he is supporting rate increase at this moment. Dallas Fed President Kaplan  is expecting slow and gradual normalization of monetary policy  and further strengthening of US labor market with unemployment rate below 5%, heading toward full employment. San Francisco Fed Chief Williams noted that rate increase will be on a table for June, but still leaving the option for July, considering timing of Brexit. Britain referendum is mentioned as one of the external risks for US economic outlook during previous FOMC meeting, and in this sense it will be discussed again during June meeting. Considering that Brexit is scheduled only one week after June FOMC meeting, several Fed officials see this as a reason for decision to be postponed for July meeting. On the other side, taking into account that Britain-EU succession, if voted “Yes” would last next two years, it leaves enough time for Fed to adjust its policy if necessary, considering that exact estimation of full consequences cannot be exactly made at this moment. On the other side posted results on US economy are showing significant improvement. During last week results posted on new home sales beat any market expectation.  Increase of 16.6% on a monthly basis has not been seen for previous 24 years. Taking into account further 1.7% increase in existing home sales posted on Monday, and pending home sales jump of 5.1%, implies on general rebound of housing market in the US and, most of all, increased confidence on the economic outlook. Week ahead is going to be one of the quite important weeks prior to FOMC meeting considering that many important data will be released including unemployment rate, hourly earnings and non-farm payrolls, based on which Feds rate decision is much more dependent on.

Central event during previous week for Japan economy has been release of April CPI figure of -0.3%, down from -0.1% during March. Considering that one of the major issues that BOJ is coping with is deflation trend due  significant quantitative easing has been conducted during previous months, inability to generate inflation is currently imposing a question if BOJ will simply need additional stimulus during next monetary policy meeting. On the other side, newly appointed BOJ member Harada, noted that new stimulus might be employed as a response to increasing external risks coming from China slowdown,  EU debt crisis and US monetary policy, noting that implemented monetary measures influenced moderate recovery of Japan economy, putting in question market expectations on next BOJ policy action. Additional burden for Governor Kuroda and Minister Abe is coming from high volatility of currency, which is by many financial analysts currently seen as overvalued. However, it has been agreed on latest G-7 meeting held in Japan, that “competitive devaluations” should be avoided by monetary authorities. Next BOJ Monetary policy meeting is scheduled for June 15-16.

The currency pair USD/JPY finished week at level 110.34.

 FUNDAMENTALS WEEKLY UPDATE :  

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

Monday , May 23, 2016 :

  1. Japan Merchandise Trade Balance: posted results for April show further increase in trade balance to Yen823.5b from previously posted Yen754.2b. Figure was significantly better from market consensus of Yen521.4b. Trade balance surplus increase is coming mostly from decrease in imports of -23.3% on a yearly basis, while exports dropped for -10.1% compared to same period of last year.
  2. Japan Nikkei PMI Manufacturing index is modestly decreased to 47.6 in April from 48.2 posted previously.
  3. Japan All Industry Activity Index is surprisingly up to 0.1% on a monthly basis in March, compared to -1.2% posted for February. Figure is also above market expectation of 0.5%.
  4. US Markit Manufacturing PMI: index is quite modestly down to 50.5 from previous 50.8 and also below market consensus at 51.0.

Tuesday, May 24, 2016 :

  1. US New Home Sales: released figures absolutely beaten market expectation with increase of 16.6% in April on a monthly basis, compared to -1.5% posted for March, and above market consensus at 2.0%.

Wednesday, May 25, 2016 :

  1. US Goods Trade Balance: results for April show modest increase in trade deficit to $-57.5b compared to $-57.1b posted for March. Market was expecting to see increase in deficit to $-60.0b.
  2. US House Price Index: results posted for March show modest increase of 0.7% on a monthly basis, compared to 0.5% posted previously and above market consensus of 0.4%.
  3. US Markit PMI: index for Services is modestly down in May to 51.2 from 52.8 posted previously, but also below market expectations of increase in sentiment to 53.1. Composite index is also down to 50.8 from previous release of 52.8.

Thursday, May 26, 2016 :

  1. Japan Buying Foreign Bonds: results posted for previous week show modest decrease in capital inflow to Yen684.0b from Yen1122.7b previously posted.
  2. Japan Buying Foreign Stocks: results for previous week show very modest increase in capital inflow of Yen182.3b from Yen152.1b from week before.
  3. Initial jobless Claims for previous week surprisingly dropped to 268k from 278k posted for week before. Figure is also better from market expectations of 275k.
  4. US Durable Goods Orders: initial figure for April shows significant increase in orders supported by transportation orders to 3.4% from 1.9% previously posted, and also significantly above market consensus at 0.5%. Excluding transportation, durable goods orders were up for modest 0.4%.
  5. US Pending Home Sales are significantly increased during April to 5.1% compared to previous month and above market consensus of 0.7%. Compared to same period of last year, pending home sales are up for 2.9%.

Friday, May 27, 2016 :

  1. Japan National Consumer Price Index: released data for April show modest drop in Japan inflation to -0.3% on a yearly basis, down to -0.1% released for March. Figure is better from market consensus at -0.4%. There has not been any change in core inflation of 0.7% on a yearly basis from previous month.
  2. US Gross Domestic Product: released annualized figure for first quarter of this year show modest increase in GDP to 0.8% from 0.5% posted initially. Figure is slightly below market consensus at 0.9%.
  3. US Personal Consumption Expenditure: revised figures for first quarter show no change from initial release of 2.1% on a quarterly basis.
  4. US University of Michigan Confidence: data for May show modest decrease in sentiment to 94.7 from 95.8 posted previously. Figure is also below market consensus at 95.5.

 

FORECAST FOR THE COMING WEEK

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

Fundamentals end of MayThis is promising to be one quite interesting week of FX markets considering fundamentals that will be released, which are currently closely watched by market.

Japan Unemployment Rate: results for April will be released. Considering that Japan unemployment rate is generally quite steady, market is not expecting to see almost any move in the figure from 3.2% previously posted.

Japan Industrial Production: preliminary results for April will be posted on a monthly and yearly basis. Important indicator to watch for Japan economy. After significant drop during February of -5.2% compared to previous month, Japan IP rebound during March with 3.8% m/m increase. However, market is expecting to see some further slowdown in indicator to -1.5%m/m for April.

US Core Personal Consumption Expenditure: results for April will be posted on a monthly and yearly basis. Considering Feds targeted 2% inflation until year end, this is one of a set of indicators to watch as indication of future inflation developments. Core PCE for March was 0.1% m/m and 1.6%y/y, while market is expecting modest increase in index of 0.2% m/min April, but without change on a yearly basis.

Federal Reserve Beige Book: is providing information on current situation in US general business environment and sentiment. Although release of Beige book usually don’t imply any significant market reaction, it is valuable source of current development in US economy.

US Unemployment rate: results for May will be posted. This is currently extremely important indicator to watch, considering Feds targeting of full employment. During last two months indicator was standing at 5.0%, while market is now expecting its further modest decrease to 4.9%.

US Change in Non-farm Payrolls:  results for May will be posted. This is also currently one of important indicators to watch, whose increase would imply on future inflation trend and will also have implications on Fed decision to raise interest rates. Non-farm payrolls were standing at 160K during April, down from 215k posted for March.

US Average Hourly Earnings: results for May will be posted both on monthly and yearly basis. Currently it is also included in a group of important indicators to watch, indicating on future spending and inflation trend. Previously, indicator was standing at 0.3%m/m and 2.5% y/y, while market is not expecting any significant change from previously posted figures.

 

 

 

 

 

USD/JPY Technical Analysis

During previous week currency pair was moving in a range 109.06 up to 110.4 without clear trend, testing both short term support at 109 and long term resistance at 110.

Inability to break long term resistance at 110, would lead currency pair down to next support levels at 109.6 down to 107.8.

On the other side, clear break of 110 resistance would lead to testing next short term resistance levels at 110.7 up to 112.

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

Chart end of May

 

 

 

 

 

 

 

 

 

 

 

 

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

USD/JPY MARKET FORECAST

  • SEB AB: “we expect the yen to fall back again” Bloomberg
  • Goldman Sachs Group: “We are very bearish the yen” Bloomberg
  • 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.

For next week I am neutral on USD/JPY

As FOMC meeting is coming closer, market expectations on rate hike are heated. Many comments from Fed officials are implying on such possibility supported through fundamentals released on US economy, which is evidently on a path of modest but steady growth. On the other side, Japan is still struggling with deflation as figures posted during last week show further drop in CPI. Whether this will be a moment for additional stimulus from BOJ, or not, is up to be seen on next BOJ policy meeting in June.

During previous week USD/JPY was moving in a range 109.06 up to 110.4 without clear trend, testing both short term support at 109 and long term resistance at 110. For the next week I am expecting currency pair to move in relatively the same range between 109-110.5.

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