USD/JPY Forecast: Worry is our ally

• The yen rises and falls with fears of the Corona virus.
• Manufacturing contracts and coincident index remains weak.
• US statistics should bolster dollar/yen in the week ahead.

The yen continued as the main barometer for the market’s fears and hopes surrounding the corona virus in China and its potential to disrupt the mainland and global economies.  

After reaching 108.35 last week on the rising infection and death rates in China, similar news this week did not provoke the same reaction.

Tuesday’s sharp gain for the dollar-yen was prompted by several factors.  In China the government committed to maintaining its economic growth despite the many disruptions from the corona virus.  In the US White House economic advisor Larry Kudlow said that he expected  “minimal impact” on supply chains, a sentiment that was seconded by other business executives.  Treasury rates also rose with the yield on the 10-year generic rising seven basis points to 1.60%.

On the hourly charts 109.55 had been a two week top and the break quickly became support for the balance of the week.

Japanese statistics February 3-7

Japanese data was mostly negative or little changed. Manufacturing PMI for January on Monday dropped to 48.8 from 49.3 and missed the 49.3 forecast, stretching the string of contraction to nine months.  Household spending fell 4.8% on the year in December almost triple the -1.7% prediction and more than double the November decline.  Spending has dropped an average of 4% a month in the fourth quarter.

The preliminary coincident index for December from the Cabinet Office that tracks the overall state of the economy came in at 94.7, slightly below expectations, unchanged from November and at its lowest level in more than five years.  

US Statistics, February 3-7

US manufacturing unexpectedly returned to positive territory In January with ISM reporting 50.9 on a 48.5 forecast and December’s 47.8 result. It was the first expansionary since August. New orders jumped to 52 from 47, their first positive since July. Employment rose to 46.5 from 45.2. 

Markit reported 51.9 for its January PMI its lowest reading since October’s 51.3, but unlike ISM this series never dipped below 50 into contraction.

Wednesday’s ADP employment for January at 291,000 almost doubled the 156,000 forecast and following Decembers 199,000 set the stage for the NFP report on Friday.

Services PMI for January from the Institute for Supply Management was 0.5 points better than predicted at 55.5. New orders rose less than expected to 56.2 from 55.3 and employment fell to 53.1 from 54.8. 

Initial jobless claims on Thursday dropped to 202,000 in the last week of January bringing the 4-week moving average down to 211,750, near its half century low.

The government’s Employment Situation Report for January followed through on the ADP figures as the economy created 225,000 positions, far more than the 160,000 estimate. Annual wages rose to 3.1% and December was revised up to 3% from 2.9%, stretching the run of 3% or higher months to 18. The unemployment rate rose to 3.6% as more people sought work which was also reflected in the labor force participation rate which rose to 63.4% the highest level since June 2013.

Statistics conclusion

American information was generally upbeat closing the week on a strong note as non-farm payrolls and attendant statistics showed that the US labor economy, the backbone of the expansion over the past year, continued to create jobs and prosperity.   

Japanese information, while not overtly negative gave no hints that the manufacturing recession has abated or the overall level of economic activity had benefited from the US-China trade pact signed in January.

Japanese statistics February 10-14

The Economic Watchers Survey from the Cabinet Office charts regional economic trends. Its January results on Monday, expected to be 47.1 following December’s 45.4, will leave this indicator well below the median score for the past three years. Machine tool orders for January on Tuesday are a volatile series that dropped 33.6% year over year in December and rose the same amount in November. Friday’s tertiary index tracks the domestic service sector and is forecast to fall 1.6% in December after an 1.3% gain in November.

US statistics February 10-14

Federal Reserve Chairman Jerome Powell testifies on Tuesday before the House Financial Services Committee with the Fed’s Semiannual Monetary Policy Report to Congress and on Wednesday before the Senate’s Committee on Banking, Housing and Urban Affairs.  While these are not policy events the Chairman will likely tout the positive direction of the US economy especially after the January NFP report.

Thursday’s initial jobless claims and CPI reports will give evidence that the US economy is creating large numbers of jobs without exciting wage or consumer inflation.

Friday’s retail sales figures for January with steady growth of 0.3% overall, 0.4% in the control group and 0.4% ex autos should give additional proof that the US consumer remains enlivened by the excellent labor market. The preliminary February consumer sentiment number from the Michigan Survey is expected to be 99.7 and will back up the active consumption scenario.

Statistics conclusion

Japanese data next week is unlikely to provide support for the yen. In the US the positive testimony of Jerome Powell and the probable good reports in retail sales, jobless claims and CPI, will give the US economy ample good notices adding to the upward pressure on the US dollar. 

USD/JPY technical outlook

The gyrations in the USD/JP since the turn of the year have been primarily non-technical driven by risk perceptions surrounding the corona virus in China.

As we noted last week, risk is a type of fundamental analysis that encompasses the stability of a nation’s political and economic systems and its ability to withstand great financial stress. In Asia the choice has long been Japan for the rest of the world it is largely but not exclusively the US. 

The primary motivator for the USD/JPY will remain risk perception from China until the health crisis on the mainland is no longer seen as a threat.

The 21 and 100-day moving averages have aimed higher since last year and have not been detered by the risk variation over the past six weeks. The 200-day average has yet to turn higher but it did mark the lower limit on January 31st and February 3rd around 108.35. 

Near range resistance is at 110.00 the high this week and 110.30 the top in mid-January.  Beyond that we have to return to the middle of last year with a coincident weakening in strength at 110.70 and 111.00.  A head and shoulders formation in April and May last year provide strong lines at 111.70 and at 112.15.

The rapid risk based moves of this year gave little time to establish dependable supports. The line at 108.40 represents both the recent low and a series of bottoms from mid-November to mid-December. Below that there is a weak line at 108.00 and another at 107.50.  The August to September lows could serve as guideposts if the USD/JPY reaches those levels on a fundamental or risk based move.  Support would be at 107.00, 106.75 and 106.50.

USD/JPY sentiment poll

Risk perceptions have dominated the sentiment poll this week. 

The one week view remains bullish at 50% unchanged with the bearish sentiment falling to 21% from 48% and neutral rising to 29% from 0%.  The forecast reflects this week's  recovery at 109.68 from 108.46.

In the one month outlook the bullish view drops to 31% from 44%, bearish falls to 42% from 48% and sideways climbs to 27% from 8%. The forecast is higher at 109.45 from 108.64. 

The one quarter view is less bullish, 31% vs 43%, more bearish 50% vs 40% and slightly more neutral 19% vs 17%.  The forecast is higher at 109.18 from 108.77.

The most interesting fact in the one week and one month views is the sharp rise in the neutral quotient. It is a recognition that the USD/JPY is functioning as a risk barometer on the China health crisis and that economic and technical factors are seconday.