JPY news - page 25
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USD/JPY: On Escape Velocity Toward 120
Although we believed 2016 would be a year of yen appreciation, we saw it as corrective strength. While things have gone both right and wrong, our main points are largely unchanged. We believe JPY's weakness has resumed and will manifest into 2017. We expect USD/JPY to rise to 120 – when currency diplomacy will become a serious concern.
Risk reward has shifted from yen buying to yen selling. Multiple forces supported the outlook for a stronger yen this year, but the strongest argument was positioning. Potential USD/JPY buyers almost dried up, while potential sellers accumulated. Of course, whether the yen would appreciate depended on the global macro environment, but the positional skew showed that in terms of potential price range and probabilities, the risk/reward balance was better for yen buying than for yen selling. However, we believe this state of affairs reversed this summer.
Return of policy divergence. Rising interest rates in the US are pulling up global rates, but the JGB market has largely managed to insulate itself. As such, spreads between foreign and yen rates have widened across the board. In the environment of rising foreign interest rates, the Bank of Japan's yield curve control amplifies its impact on the currency market as long as it remains credible.
Reflation policies continue to be the political tactic. Political incentive to create a better economic environment before a possible snap election – as early as early next year – suggests the probability of fiscal expansion is not low. The BoJ can counter the upward pressure on yields from potential fiscal easing. This could lead to higher inflation expectations and lower real interest rates.
Bullish technical picture. Technical analysis shows USD/JPY made a triple bottom pattern in 3Q16 and began an uptrend in 4Q16. Measured move analysis from the November 2016 trend line break suggests USD/JPY will initially reach 116.48. We also think there is potential for USD/JPY to retest previously important technical levels in 2017 such as 121.15, 123.75 and cannot yet rule out the 2015 highs of 125.85.
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Japan - Monetary base for November: +21.5% (prior +22.1%)
Japan's monetary base
USD/JPY forecast for the week of December 5, 2016
The USD/JPY pair went back and forth during the week, as we continue to see quite a bit of volatility. This is a market that is overbought at the moment though, so quite frankly I want to see this market pullback in order to start going long again. Even if we broke above the top of the candle at that point I would be very hesitant to start buying, simply because the recent 14% gain is a bit much, even for this pair which tends to be a quick mover.
USD/JPY: Weekly Forecast December 5-9
USD/JPY started off last week’s trading with a decline to test first support and subsequently rebounded to test the next level of resistance at the highs established February of this year. This test of resistance, combined with the persistent overbought condition, set the pair up for a period of correction. At week’s end, USD/JPY was at 113.50, off the newly established high at 114.827 and up roughly a quarter of a percent over the prior Friday’s close.
With the Thursday-Friday pullback, the risk heading into next week’s trading is for a return to first support at the November 28th 111.36 low, which represents a test of the high established in late May of this year. A drop back down to this level would result in no technical damage to USD/JPY.
Given the overbought condition on both a daily and weekly basis, as well as the downward momentum currently being displayed by the dollar, a move down to this level of support appears possible. The dollar ended the week with a test of support at the November 22nd low at 100.65. A further move lower in next week’s trading would result in a break of this support, a development that could spark additional selling in the dollar, thereby resulting in further weakness in USD/JPY.
Should first support for USD/JPY at the 111.36 level fail to hold, the next level to watch is at the 110.270 level, followed by 108.550. Key support on a drop below these levels comes into play at the July rally high at 107.494. At present, a correction to test this former high is not expected to take place, given the broader bullish technical outlook for the pair.
In last week’s trading, data out of the US was overall positive. Non-farm payrolls increased by 178,000 versus consensus estimate for a rise of 180,000. The lead headline was that the unemployment rate fell from 4.9% to 4.6%, the lowest rate since August 2007. November average hourly earnings, however, were down 0.1%, versus consensus forecast of +0.2%, following a 0.4% rise in October. Overall, however, the report still supports a rate hike at the December FOMC meeting. At week’s end, fed fund futures were pricing in a 92.7% chance of an interest rate increase at the December 13-14 FOMC meeting.
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BOJ Deputy Governor Iwata: Won't hesitate to take additional easing steps
Bank of Japan dep gov speaking
There is no doubt BOJ's QQE policy was effective in pulling Japan out of deflation
Japan (final) Q3 GDP: +0.3% q/q (expected 0.5%, preliminary was 0.5%)
Final GDP data for Q3 and BoP numbers for October
USD/JPY Outlook Heading into Asia Trading
The USD/JPY edged slightly lower to close down by 0.2% in New York to ¥113.74. Trading over the course of the past few sessions has been choppy in overbought territory. The Relative Strength Index (RSI) is moving lower from a peak of over 80, indicating the lack of momentum the past week while trading in a state of overbought. The divergence registered in RSI since the end of November could be considered a minor negative given how far the pair has run since the U.S. presidential election.
The advance is stalling at resistance formed in March and February when the USD/JPY was consolidating for a move lower. The 20-day moving average, which the pair had become extremely stretched away from, is quickly rising up and may help provide support should a deeper retracement develop.
If the USD/JPY can keep holding and not decline below the low at ¥111.35 and hold the 20-day moving average, the recent period of indecisive trading will likely be viewed as consolidation for another bullish move. The next level of resistance to take notice of is at the 61.8% Fibonacci retracement of the sell-off from June 2015 to June of this year which is at ¥115.40. A little higher from there are bottoms created in August of 2015 and January at just above the ¥116 level.
The ECB rate announcement at 12:45 GMT and press conference at 13:30 tomorrow may impact volatility in financial markets and the USD/JPY in the short-term.
USD/JPY forecast for the week of December 12, 2016
The USD/JPY pair rallied again during the week, breaking above the 115.00 level on Friday. The market looks as if it is ready to try to continue going higher, but quite frankly it is overextended by just about any measure of the market. With this, I believe that a pullback is coming, and quite frankly I think we need one desperately. Once we get a nice pullback, I’m willing to buy on signs of support but obviously that has not happened quite yet. I also have no interest whatsoever in selling this pair as I believe the trend has changed.
Japan data: October Machinery Orders +4.1% m/m (expected +1.1%, prior -3.3%)
Japan's Cabinet Office publish private sector machinery orders (excluding volatile ship and power equipment)
A Fed's Hike This Week + 2 More Hikes In 2017 = USD/JPY At 120
We expect the FOMC to raise its targets for short-term interest rates by 25bp at its meeting this week. Recent public statements by Federal Reserve policymakers suggest that there will be little dissent on this point.
The bigger question is what will the FOMC and Chair Yellen signal about 2017 and beyond? Since the September meeting, three things have happened. First, as noted above, the economy has evolved in a way that is generally consistent with the FOMC’s forecasts. Second, financial conditions have tightened, primarily through increases in long-term interest rates and the appreciation of the dollar. Finally, the US election was held.
The one place where we expect the FOMC to make a change is in its assessment of the balance of risks. For many years, the Federal Reserve and financial market participants have been concerned about how the US economy would respond to negative shocks in part because they assumed that the only substantive policy response would come from monetary policy. In the wake of the election, it seems much more likely that we will get a robust fiscal response to any significant negative shocks to the economy.
This judgment has a number of implications. First, it should probably raise the risk premia in the treasury market, both for nominal and inflation-protected securities. But this should also affect how the FOMC assesses the risks to its outlook. That is, this change in assumptions about the fiscal policy should make the balance of risk more favorable. In their last statement the FOMC noted that “near-term risks to the economic outlook appear roughly balanced.” We expect the FOMC to change this in a way that indicates that the balance of risk has improved.
FX: USD/JPY En-Route To 120.
If the Fed raises rates this week and carries out two additional rate hikes in 2017, as our economists expect, USD/JPY will likely reach 120 by end-2017.
USD would tend to strengthen more in the latter half of the year, when we would know more about the Trump administration’s fiscal policies. At the same time, there is considerable uncertainty about the US’s economic measures in 2018, and at this point we expect a neutral level of 114 at end-2018.
For USD/JPY to stay above 120, we believe the US economy, which is already entering the last stage of its recovery, has to show a significant rise in productivity.
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