Yesterday, the US dollar opened at Friday’s elevated levels of 113.70 but was unable to sustain against most of its G10 rivals, including the yen. Weak economic data took a toll on the greenback, while uncertainty due to trade tensions increased the demand for the yen. From 113.70, the USDJPY pair has declined to 112.80 in the past 24 hours, but a trend reversal may happen tomorrow due to the reason provided herewith.
Poor economic data weakens the dollar
Factories in New York State reported a steep decline in business, pushing a Federal Reserve index to a 19-month low and adding strength to the argument that the US economic growth is moderating. The New York Fed said the Empire State manufacturing index dropped 12.4 points to 10.9, which is the weakest level in 19 months. According to Econoday’s survey, economists had expected a reading of 20.1. Any reading above zero indicates improving conditions. The reported data was weak but not too bad as it reflects business expansion in New York but at a slower pace. The report said: “Looking ahead, firms remained fairly optimistic about the six-month outlook, though optimism was slightly more tempered than in November.”
The National Association of Home Builders reported a disappointing builder confidence index of 56 in December, down from 60 in November. The December fall pushed the sentiment index to its lowest since May 2015 and missed the Econoday outlook of a one-point increase. With this decline, the FY18 average for the index has fallen to 67, a point below last year.
Following the economic data, the US Dollar Index, which opened at 97.44, retreated to 97.08. Monday’s opening reading was close to the 19-month high of 97.71.
The yen, in the meanwhile, strengthened against its major rivals at the beginning of this week. Ironically, weak economic data calls for the currency to head lower. Furthermore, during the policy meeting scheduled this week, the Bank of Japan (BOJ) is anticipated to warn of increasing growth risks to the domestic economy.
Citing volatile financial markets, the US-China trade war, and unpredictable demand from China, BOJ officials are expected to forecast that the economy will continue to cool down. Due to this, the BoJ is maintaining the decade-old ultra-loose monetary measures, like purchasing bonds and negative interest rates.
The Tankan survey, a quarterly economic study conducted by the BOJ, shows that sentiment among large manufacturers were mostly unchanged between November and December. For the second month in a row, the reading was flat at 19 after three straight quarters of declines.
In addition to the above issues, Japan is also facing the threat of high-risk US loans.
According to the latest estimates from UBS Group AG, Japanese financial institutions have issued one-third of the loans offered to US enterprises with high leverage. The recent figures indicate that these banks have granted loans to the tune of about $1 trillion.
While the debt issued by AAA companies has been regularly purchased by the Japanese banks in recent years, there are signs of cracks. This month, as of date, more than $2.5 billion has been withdrawn from leveraged-loan funds. Wells Fargo and Barclays, for instance, removed $415 million from the market.
The UBS research report, prepared by analyst Stephen Caprio, reads as follows: “The Japanese bid for US loans will not be easily broken. Most Japanese banks are buy-and-hold investors; outright selling will be fairly limited unless the prospect of outright credit losses becomes likely, necessitating much higher recession risk than today.”
Notably, several economic releases related to Japan disappointed markets last week. The corporate goods price index increased, core machinery orders grew lower than anticipated, and the Indices of Tertiary Industry Active slightly exceeded median estimates.
Despite the weak economic data, the bullish outlook for the greenback remains in place, at least until the Fed publishes its policy tomorrow. Therefore, a hawkish statement confirming the continuation of rate hikes could reverse the trend in a flash.
Technically, the USDJPY pair seems to have found support at 112.70. Furthermore, the stochastic indicator is in the oversold region. As a result, traders can anticipate a trend reversal soon. So, it is wise to avoid short positions at this point.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
