U.S. Dollar Subject To Downside Risk, Weak Inflation Data From Japan
Swissquote Bank Ltd | May 27, 2016 07:56AM ET
Forex News and Events
Still not buying the hype
Data released yesterday indicates that key areas of the US economy remain soft, keeping the Fed on hold for June. Areas in the economy directly are exposed to external demand. Orders for durable goods increased 3.4% from 1.9%, significantly higher than expected as nondefense aircraft orders surged. However, the increase was expected after not showing up in the April report. Despite the decent headline numbers, the report indicates that factory demand is not showing any signs of significant recovery from its Q1 weakness. Orders for nondefense aircraft climbed 65%, adding 2.9% to the top line print; however, the rest of the report was less impressive. Orders for non-transportation good rose 0.4%, while core capital goods disappointed, contracting 0.8%. Despite the questionable data, Fed members continue their hawkish rhetoric. Fed Governor Powell provided the clearest signal of his preference for a near-term rate hike, as long as the data allowed. Powell stressed his decision was not absolute and that the policy path was also highly contingent on incoming data. US front-end yields, and therefore USD, are being driven not by Fed hawkish hype, but economic data. Reacting to the disappointing data, the US yields curve shifted lower, with U.S. 2-Year yields slipping sharply 5bps to 0.86%. US Dollar Index fell .04%, to 95.15.
We still expect weak global demand to continue to spill over into US growth. This contagion has been highlighted by a steady erosion in manufacturing PMI, challenging the recent 2Q growth acceleration. In addition, labor market weakness in April’s job report should endure next week with a sub-100k NFP read. While indications from Fed fund futures are now against us (July 54% probably of a 25bp hike), we do not expect the Fed to hike interest rates this summer. We are waiting for Yellen to provide cautiously dovish support for our theory. However, today’s speech at Harvard is an unlikely place for policy signaling. More likely we will hear policy direction at Yellen’s 6th June policy speech in Philadelphia. This will be a critical opportunity for Yellen to signal the FOMC’s intentions prior to going silent ahead of the 14-15th June policy meeting. From a fundamental stand point we remain short USD.
Ahead of the long US weekend the US is scheduled to release annualized GDP Q1 (revised higher to 1.0%), core PCE and U. Michigan (consumer sentiment to be revised).
Japan: Inflation declines again
Japan's National CPI for April came in higher than expected at -0.3% y/y, but still lower than prior March data. The other inflation figure, the Tokyo CPI also printed below prior data at -0.5% y/y for this month. The very soft data will make it difficult to achieve the inflation target of 2% by the end of 2017. Common sense makes us wonder exactly how a country can achieve its inflation target in a year and a half when it has failed to do so for the last two decades.
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The reality is that it is also the second straight month that inflation has been lower. The BoJ may believe that the recent yen strength is adding too much downside pressures on inflation. We clearly believe that the sales tax hike, planned to take place in 2017 will now be delayed or even taken off the table completely. From our vantage point, the BoJ will try to avoid any unnecessary turmoil concerning their domestic economy.
Other issues are now likely to arise and Japan’s number may well be up. Rating agencies are starting to wonder whether Japan should be downgraded as future economic expectations now completely uncertain. The island’s massive debt, a debt-to-GDP ratio of 250%, will bury hopes for a sustainable recovery for a very long time.
USD/JPY - Volatility Lowers.
The Risk Today
EUR/USD is bouncing towards 1.1200 within the downtrend channel. Hourly resistance is located at 1.1227 (24/05/2016 high) and 1.1349 (17/05/2016 high). Stronger resistance lies at 1.1616 (12/04/2016 high). The technical structure suggests further downside moves within the downtrend channel. In the longer term, the technical structure favours a very long-term bearish bias as resistance at 1.1714 (24/08/2015 high) holds. The pair is trading in range since the start of 2015. Strong support is given at 1.0458 (16/03/2015 low). However, the current technical structure since last December implies a gradual increase.
GBP/USD is bouncing back from 1.4700. The pair has failed to reach hourly resistance at 1.4770 (03/05/2016 high). Hourly support is given at 1.4637 (intraday low) and 1.4404 (15/05/2016 low). Expected to show renewed bullish momentum toward resistance at 1.4770. The long-term technical pattern is negative and favours a further decline towards key support at 1.3503 (23/01/2009 low), as long as prices remain below the resistance at 1.5340/64 (04/11/2015 low see also the 200 day moving average). However, the general oversold conditions and the recent pick-up in buying interest pave the way for a rebound.
USD/JPY is still trading around 110. The pair is trading sideways between hourly support at 110.59 (20/05/2016 high) and hourly support at 108.72 (18/05/2016 low). Expected to show further weakening towards 108.72 as the medium term momentum is oriented downwards and the technical structure suggests a further strong bearish move as the medium-term momentum should prevail. We favour a long-term bearish bias. Support at 105.23 (15/10/2014 low) is on target. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems now less likely. Another key support can be found at 105.23 (15/10/2014 low).
USD/CHF is still trading mixed after breaking symmetrical triangle. Hourly resistance can be found at 0.9938 (24/05/2016 high) while hourly support is given at 0.9872 (26/05/2016 low). Expected to show a continued bearish consolidation move. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours a long term bullish bias since last December.
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