- USD/JPY was approaching its long term downtrend at 112.72 but bulls capitulated on Thursday.
- USD/JPY slid below the 112 handle overnight on the BoJ in thin trade and the bleeding continued in late London.
- USD/JPY is currently trading at 111.55, up from a low of 111.36 and from a high of 112.23.
USD/JPY pierced below the 112 handle overnight on a delayed reaction to the BoJ in thin trade with the Antipodes out making for thin liquidity. The BoJ kept its QQE with yield curve control unchanged but it tweaked the forward guidance somewhat. The BoJ is now saying they “will keep very low-interest rates levels for an extended period of time at least through to around spring 2020” – That is more specific, where was until there was no time frame given. However, the BoJ also cut its GDP forecast for FY2018 ending in March from 0.9% to 0.6% as well as cutting the FY2019 and 2020 GDP inflation forecasts. The new inflation outlook now includes FY2021 and the BoJ expects CPI inflation to hit 1.6% by then which means that the BoJ doesn’t forecast meeting its target within a two to three-year horizon.
Outlook for markets proving fickle
Meanwhile, the outlook for markets is proving fickle considering it was just about a week ago that the narrative had moved towards positive considering China’s improving data and moves towards stimulus coupled with some green shoots from the German ZEW data. We had a risk on environment, and the pessimism over the global economy seemed to be overcooked. However, as we have risk aversion has started to creep in again which is supporting the greenback as the cleanest of dirty shirts in the FX space. There are once again reminders that Germany is not out of the woods considering the preliminary April manufacturing PMI report that fell short of expectations and then this week’s IFO survey hammered the nail in the coffin for the euro which is now knocking on the doors of the 1.10 handle. Now with policymakers in China walking back on prospects for more easing as well, when coupled with various other downbeat assessments fro the likes of BoC and in Aussie CPI, the dollar can continue higher which should be supportive to USD/JPY when looking ahead.
“Our best guess is that recent developments are more a redefining of new (lower) ranges for currencies rather than the beginnings of a new meaningful multi-week trend that sends the USD materially higher. That, however, does not preclude a test of 1.10 in EUR/USD and a DXY at 100,”
analysts at Westpac argued.
As for data, looking ahead, the USD and global outlook will depend on 1) US – advance Q1 US GDP, 2) FOMC, 3) ISM and 4) payrolls; 5) Eurozone – Q1 GDP, final 6) April PMIs and 7) April advance CPI data; and 8) China – NBS and Caixin PMIs.
Analysts at Commerzbank note that USD/JPY remains stuck between cloud support at 111.21 and tough overhead resistance:
“This includes the 112.13 March high, the 112.43 55 quarter moving average and the 112.72 2015-2019 downtrend. This is extremely tough resistance and should cap the topside. Failure at cloud support is needed to alleviate immediate upside pressure and will re-target the 109.70 recent low. The 109.70 low guards the 38.2% retracement at 109.06 and there is scope for the 50% retracement at 108.11. Where are we wrong? Above the 112.72 downtrend will target the 114.55 October 2018 high.”