Yen Remains Strong Despite Weak Economic Data

Yen Remains Strong Despite Weak Economic Data
July 14, 2019

 

The US dollar fell against the Japanese yen during the Asian session yesterday despite a string of weak economic data from the Pacific Island nation, indicating a slowdown in the world’s third-largest economy. The greenback’s decline was fueled by concerns over the inclusion of Chinese Commerce Minister Zhong Shan, a well-known hardliner, in the team holding talks with the US. However, the clarification issued by Beijing enabled the US dollar to climb back and regain the lost territory. The yen opened at 108.45 against the dollar yesterday, fell to 107.58, and rebounded to hit a high of 108.61. The USD/JPY pair is currently trading at 108.38 at the time writing this article.

Economic experts believe that the yen is strengthening due to two main reasons, namely the possibility of a rate cut by the Bank of Japan in line with the Federal Reserve’s decision to slash interest rates and optimism over renewed US-China trade talks.

The Japanese Ministry of Economy, Trade, and Industry reported a 0.2% m-o-m contraction of Tertiary Industry Index in June, compared with a 0.8% expansion in May.  The median estimate of analyst’s forecast a 0.1% m-o-m decline. Tertiary Industry Index is a measure of domestic services activity.

According to the Ministry of Finance, foreign bond investment by Japanese investors jumped $2.75 billion in the week ended July 6th. The figure represents the sixth successive week of gains. The last time investment contracted was in the final week of May.

The report also stated that investment in stocks by overseas investors grew by roughly $2 billion in the same reported period, reflecting the second consecutive month of increase. However, between mid-May and June end, stock investment by foreigners had dropped by roughly $3 billion.

In the meanwhile, the Bank of Japan reported that the Producer Price Index (PPI) fell 0.1% in June, following a 0.6% rise in the earlier month. The market had estimated a 0.4% increase. Notably, machine tool purchases dropped 38% in June, higher than the 27.3% decline in the prior month.

The weak data, however, did not affect the USD/JPY pair which drifted downwards in early Asian session yesterday.  That was due to concerns over the unanticipated shuffling of China’s team that negotiates with their US counterparts. The Chinese government included Commerce Minister Zhong Shan, perceived as hard-liner by some White House officials, has taken a key role in talks over the phone, with Chinese Vice Premier Liu He alongside. Liu has been leading the Chinese trade team for over a year.

Commenting on Zhong’s inclusion, Dennis Wilder, a former China analyst at the Central Intelligence Agency, said: “This has to be seen as a loss of confidence in Liu He and the desire of the leadership to bring in someone more politically savvy. I am sure his instructions are to get tougher with the U.S.”

 

During the US session, the USD/JPY pair recovered as Beijing downplayed the inclusion of Zhong with the Commerce Ministry’s spokesman Gao Feng saying that it was “quite normal” as “the [Commerce] Ministry is in charge of trade negotiations.”

The US dollar’s recovery is expected to be short-lived as economists do not anticipate a quick resolution to the outstanding trade issues.  Therefore, the yen, which is considered as a safe-haven asset, may gain ground against the dollar in the days to come.

Technically, the USD/JPY pair is facing resistance at 108.60 levels. The currency pair is trading below its 50-day moving average. Furthermore, the MACD histogram has a negative reading. As a result, we can expect the USD/JPY pair to turn bearish in the days to come.

JPY - technical analysis - 14th July 2019

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.

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Andrew Wright

Prior to founding tradersasset.com in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.


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