USD/JPY – Yen Subdued at 111, US Consumer Confidence Next

USD/JPY continues to have a quiet week, as the pair trades just above the 111 line. In Japan, Household Spending declined 0.4%, better than expectations. Preliminary Industrial Production posted a gain of 0.4%, easily beating the forecast. Over in the US, today’s key release is CB Consumer Confidence. The markets are expecting the indicator to improve to 96.1 points. On Wednesday, the US releases ISM Manufacturing PMI.

US indicators wrapped up last week on a positive note. Preliminary GDP, which can be viewed as an economic report card, posted a gain of 0.8%, matching the forecast. This was an improvement above Advanced GDP, which came in at 0.5%. Still, the economy slowed down considerably compared to the fourth quarter of 2015. The export sector has been hurt by the strong US dollar and weak global demand. Oil prices remain low, which has taken a sharp toll on the oil industry. Elsewhere, the UoM Consumer Sentiment report improved in April, climbing to 94.7 points. This marked the indicator’s highest level in 11 months, although it was short of the estimate of 95.7 points.

Speculation continues to grow that the Federal Reserve may soon raise rates for the first time this year. The Fed minutes and comments from Fed chair Janet Yellen have renewed market sentiment that the Fed may press the rate trigger this summer, and this has bolstered the US dollar. The minutes were more hawkish than expected, resulting in strong volatility in the currency markets. Odds of a rate hike in June have sharply increased, but the Fed will be hard-pressed to raise rates if key indicators don’t show improvement, particularly inflation numbers. On Monday, FOMC member John Williams reiterated that he expected the Fed to raise rates two or three times in 2016. However, there appears to be a gap between the hawkish message some FOMC members are sending out and market sentiment, as many analysts are projecting only one rate hike this year. The guessing game as to what the Fed has in mind is likely to continue into June, but it’s safe to say that another rate move will be data-dependent, so stronger US numbers will increase the likelihood of a quarter-point hike at the June policy meeting.

The Japanese inflation picture remains bleak, as last week’s inflation numbers remained in negative territory. Tokyo Core CPI, the primary gauge of consumer inflation, dipped to -0.5%, marking a fifth monthly decline. There was no relief from National Core CPI, which posted a decline of 0.3%. The Bank of Japan has had little success in fighting deflationary trends, which has hampered the economy. The yen showed little reaction to the soft inflation numbers. The currency has appreciated about 8% in 2016, hurting the critical export sector and throwing a monkey wrench into the government’s plan to resuscitate the economy. Japan has threatened to intervene if the yen continues to strengthen, but the US has warned Japan against any unilateral moves. This disagreement surfaced at the recent G-7 meeting of finance ministers, with the US and Japan publicly bickering over whether the yen’s rise has been “disorderly”. If the yen resumes its march towards the 100 level, we’re likely to see further fallout between the US and Japan over the currency intervention issue.

USD/JPY Fundamentals

Monday (May 30)

• 19:30 Japanese Household Spending. Estimate -1.3%. Actual -0.4%
• 19:30 Japanese Unemployment Rate. Estimate 3.2%. Actual 3.2%
• 19:50 Japanese Preliminary Industrial Production. Estimate -1.4%. Actual 0.3%

Tuesday (May 31)

• 1:00 Japanese Housing Starts. Estimate 3.9%. Actual 9.0%
• 8:30 US Core PCE Price Index. Estimate 0.2%
• 8:30 US Personal Spending. Estimate 0.7%
• 8:30 US Personal Income. Estimate 0.4%
• 9:00 US S&P/CS Composite-20 HPI. Estimate 5.1%
• 9:45 US Chicago PMI. Estimate 50.8
• 10:00 US CB Consumer Confidence. Estimate 96.1
• 19:50 Japanese Capital Spending. Estimate 1.9%

Wednesday (June 1)

14:00 US ISM Manufacturing PMI. Estimate 50.5

*Key releases are highlighted in bold

*All release times are EDT

USD/JPY for Tuesday, May 31, 2016

USD/JPY May 31 at 5:45 EDT

Open: 110.84 Low: 110.79 High: 111.35 Close: 111.08

USD/JPY Technical

• USD/JPY posted slight gains in the Asian session but has retracted in European trade
• 111.30 was tested in resistance earlier and is a weak line
• 110.66 is providing support
• Current range: 110.66 to 111.30

Further levels in both directions:

• Below: 110.66, 109.87, 108.37 and 107.57
•  Above: 111.30, 112.26 and 113.39

OANDA’s Open Positions Ratio

The USD/JPY ratio is almost unchanged on Tuesday, consistent with the lack of movement from USD/JPY. Long positions retain a majority (61%), indicative of trader bias towards USD/JPY moving to higher ground.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.