- Advantage of buy orders grew by 2 percentage points
- The share of open long positions went from 60 to 61%
- Closest resistance is the Friday's high at 119.90
- From below the price is supported by the 200-hour SMA at 119.60
- Almost two thirds see USD/JPY above 120 yen in three months
- Upcoming events today: US NAHB Housing Market Index; tomorrow: US Building Permits, Japanese Preliminary GDP q/q
US industrial production dropped for a fifth straight month in April as mining and utilities output declined and manufacturing stagnated, according to the Federal Reserve. Total industrial output decreased 0.3% for the second month in a row. The March decline previously was estimated at 0.6%. Capacity utilization, an indicator of slack in the industrial sector, dropped four-tenths of a percentage point to 78.2% in April. Lower capacity utilization shows businesses hold off on investment and consumers refrain from big-ticket purchases, sapping economic growth. Economists now predict gross domestic product shrank by as much as 1% in the first quarter, and hopes for a spring rebound are waning. Overall industrial output in April was up just 1.9% from a year earlier.
Meanwhile, a separate report showed US consumer sentiment unexpectedly declined in May. The Thomson Reuters/University of Michigan's flash May reading on the index came in at 88.6. It was down from the previous month's reading of 95.9 and missed expectations of a 96 reading. The drop in optimism about the economy was widespread among all age and income groups across the US. News that the world's number one economy faltered last quarter, coupled with uneven employment growth, shook households this month, fuelling concerns that spending will be slow to rebound. A strong Dollar and weak oil prices also are holding back manufacturing, further denting the possibility of a rapid bounce back in the rate of growth.
Sean Yokota, head of Asia Strategy at SEB, said that "if you look at Japan's public debt, which is about 243% of GDP, which is also one of the largest in the world." The economist comments that the BoJ needs to get the debt down before all the baby boomers retire, so they need to go through some fiscal consolidation, whether through tax hikes or through spending cuts. He also mentioned that such measures put Japan into recession, but he thinks that it also gave a bit of confidence to people; that this time when you increase the taxes, it does hit you short-term, but you can come out of the recession. Moreover, the Japanese economy is still doing relatively O.K. and the equity markets are still pretty high.
Craig Erlam, Senior Market Analyst at OANDA, commenting on the prospects of the Fed raising interest rates this year, said that there is no real difference between the Fed raising rates either in June or in September. In his opinion September just seems more likely, because it gives the Fed more time to prepare for the hike. Craig also does not see the immediate necessity for a rate hike in September, but thinks that "there is just a number of policymakers who want to test the water with the first hike, see how the markets react, how economy holds up."
Volatility to stay put until Tuesday
While the Japanese portion of the data for today is already out, there is the US NAHB Housing Market Index that is expected to stay relatively unchanged at 57, after 56 a month ago. Meanwhile, tomorrow there is likely to be much more volatility, considering that apart from the US Building Permits, the markets will be looking into the Japanese GDP growth report, which should show the same pace of 0.4% as a quarter before.
Marcel Thieliant, economist from Capital Economics, forecasts USD/JPY to be at 130.00 by the end of the second quarter. The analyst commented that he expects the BoJ to step up the pace of easing at the end of this month. "This is obviously not what other economists expect, if that happens, we will probably see a strong drop in the Yen against the Dollar and against other major currencies," Thieliant said.
USD/JPY oscillates around monthly PP
Regardless of nearly all the indicators pointing up, the trading range of USD/JPY keeps narrowing. Right now the currency pair is probing resistance around 119.50, consisting of the monthly PP and 100-day SMA. However, even if the US Dollar succeeds, this is unlikely to lead to a strong recovery, since in a flat market the importance of this level is greatly decreased, as was the case for the past two months. Though we could see a test of the current May high at 120.50.
Daily chart
On the hourly chart USD/JPY is also struggling to gain momentum, as last week it failed to gain a foothold above the 200-hour SMA. However, it does not seem that the bulls have given up just yet, meaning there still can be some activity to the upside.
Hourly chart
Bulls gain ground
The bulls are attacking on both fronts. First, the share of open long positions went from 60 to 61%. Second, the advantage of the commands set to purchase the Greenback 100 pips from the spot grew by 2 percentage points to 36%.
The market participants at other brokers appear to be more bullish on USD/JPY. Right now 66% of OANDA clients are holding long positions. SAXO Bank traders are even more optimistic towards the Greenback, being that 72% of their positions are long.
Spreads (avg, pip) / Trading volume / Volatility
Almost two thirds see USD/JPY above 120 yen in three months
The surveyed traders are mostly bullish on the Dollar. According to the latest data, 64% of them expect the US currency to cost more than 120 yen after three months. Nevertheless, the largest concentration of answers lies between 123.00 and 124.50, namely one fifth of them. Meanwhile, the average of the three-month forecasts collected between Apr 18 and May 18 is 121.02.