Market Overview

21 February 2020

USD/JPY Is on the Wing, the Japanese Economy Backed Out

The Machinery Orders released by the Government of Japan this week showed a disturbing -3.5% year-to-year decrease and a truly frightening -12.5% monthly drop in December after the indicator was on a negative side during the five of the last six months, excluding one inspiring jump by +18% in November.

At the same time, the foreign-trade balance for Japan in January 2020 came close to the lowest mark in five years performing at -¥1.31 trln, while year-to-year export volumes decreased by -2.6% and imports reduced at -3.5%. Throughout the whole week Japanese statistics turned horrible, starting on Monday with a devastating Gross Domestic Product (GDP) report of -6.3% YoY overall figure vs -3.7%, which was expected. As noted before the weakest components were private consumption (-2.9%) and capital expenditure (-3.7%), while the strongest component was external demand (+0.5%). These details may point to the domestic reasons for the economic downturn in Japan, while the coronavirus was unlikely to have enough time to produce such an effect on January's data. Thus, any kind of safe-haven buying of Japanese Yen could be limited while hedge fund managers would pay more attention to the US Dollar and gold contracts.

This is exactly what is happening now. As markets continue to fear a decline in the revenue of international companies in China, the gold spot and futures prices are on new seven-year highs and the US Dollar dominates other currencies as the best sheep in a shabby herd. Investors are not inspired by historically low interest rates of the Federal Reserve (Fed) and therefore very low income rates for the US bonds, but they seem to prefer US Treasuries as the "new safe-haven". Therefore, they are selling the Japanese Yen as the main victim.

Technically USD/JPY broke through the 110.25 resistance level and within just twenty-four hours the pair soared above 112, thanks to the automatic closing of the algorithmic trade orders of most of the short USD/JPY positions that remained in the market. The exchange rate rolled back to the 111.50 area in the early hours of today as market investors need time to get used to new levels, but the chances of new sales of the Japanese currency may grow with each day.

Global funds, and even national companies, have probably accumulated quite a lot of negative attitude towards the Yen because of the "money printer" that has been running for many years. The Bank of Japan call characterise their policy as having "quantitative and qualitative easing" (QQE) with a "price stability" inflation target of two % and a yield curve control for the Japanese government bonds close to zero. But this policy seems to bear little fruit, new trillions of the Yen don't help to accelerate the economy so far, while the national consumer price index (CPI) is still at the 0.7% level.

The fresh Purchasing Manager's Index (PMI) data today was only 47.6 for manufacturing and 46.7 for the service sector, and any PMI figures below 50 mean negative dynamics in the particular sector. Market expectations that the Japanese Prime Minister, Shinzo Abe, may have to consider another round of spending just two months after the last round of stimulus have been elevated.


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