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The USD/JPY exchange rate was trading in the range between 116.97 and 118.03 yen per dollar on Monday, as the People’s Bank of China (PBoC) was trying to stabilize the daily reference above 6.5848 yuan to the dollar level, according to the PBoC’s China Foreign Exchange Trade System. The PBoC was suspected of intervening to keep the renminbi from falling further last week, as the yuan daily reference rate fell to a five-year low of 6.5952 yuan per dollar on Friday, while the spread between the onshore (CNY) and offshore yuan (CNH) spot surged as high as 19 basis points.
The widening spread might have triggered capital outflows earlier last week, meaning sell or short the yuan denominated assets and rotate into dollar assets, or safe-haven currencies such as the Japanese yen. The Japanese yen appreciated 2.4% last week to close at 117.44 yen per dollar on Friday, while the Nikkei 225 tumbled 7.02% for the week to close at 17,697.96. As Japan is an export-oriented economy, the yen and the Nikkei 225 move inversely with one another, meaning if the yen appreciates against the U.S. dollar, Japanese financial markets will decline and vice-versa.
FX currency traders seemed to shrug off the headline news last Friday from the U.S. Department of Labor saying that nonfarm payrolls for December came in at 292,000, exceeding economists’ expectations of 200,000. The better-than-expected jobs report shifted the 50% plus probability of a rate hike from the Fed’s FOMC June 15 meeting to April 27, according to data from the CME Group.
The U.S. dollar was under selling pressure last week, as the PBoC began its yuan intervention. A Shanghai trader at a major European bank told Reuters that state-owned banks were offering dollar liquidity around 6.52 yuan per dollar and were apparently trading on behalf of the PBoC to help control the pace of yuan depreciation.
A strong yen would not be positive for Japan, as the Ministry of Economy Trade & Industry of Japan said in late December that preliminary industrial production dropped 1% in November from October, compared to the forecast for a 0.5% drop. On a year-on-year basis, output was up 1.6%, in-line with expectations, after 3 straight months of declines. The trade ministry also said that retail sales declined 2.5% from October, citing sluggish sales of winter clothing due to relatively warm weather and a drop in fuel sales, reflecting lower gasoline prices.
According to the Japan Times in late December 2015, the Cabinet Office of Prime Minister Shinzo Abe said it expected the Japanese economy to grow about 1.7% in real terms in fiscal 2016 starting next April, led by recovering consumer spending and solid capital investment. The government said that around 0.3 percentage points of the overall growth will come from an increase in demand prior to the planned consumption tax rate hike in April 2017, up from 8% to 10%.
The U.S. economy doesn't fare much better, as Goldman Sachs revised their U.S. GDP growth forecast downward to 2.2% in 2016, from 2.5% in 2015, said The Wall Street Journal last week.
As of January 5, there were 73,563 short positions of Japanese yen, traded on the Chicago Mercantile Exchange (CME) in units of 12,500,000 Japanese yen, by leveraged funds, a decrease of 2,155 contracts from the previous week, according to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC). This is compared to about 49,626 long positions, an increase of 18,636 contracts during the same period. The net long positions increased by 20,791 contracts, worth about 259.89 billion yen.
From our technical viewpoint, the USD/JPY broke down the trendline support of the symmetrical triangle chart pattern, a narrow trading band between 118 yen per dollar and 125 yen per dollar, as traders become more bullish on the Japanese yen. If the breakdown event is confirmed, meaning the currency pair closes below the 116.17 yen per dollar level, or the August 2015 low, there is a high probability that the USD/JPY could pull back and test the 111.58 yen per dollar support, or 50.0% Fibonacci retracement, and the Nikkei 225 could fall below the 16,000 level. |
