The widening current account deficit has been keeping the US dollar weak against its rivals, despite a historically low unemployment rate, strong GDP growth, rising inflation, and growth in wages. The economy of Japan grew 1.7% in 2017. For eight quarters in a row, the country’s economy has recorded an expansion. It is the longest streak of growth in three decades.
That enabled the yen to gain against the US dollar, despite the BoJ maintaining a short-term negative interest rate of 0.1%. However, the Fed Chair Jerome Powell’s rate hike signal coupled with the strong consumer confidence and manufacturing data reported this week indicates that the US dollar is poised for an uptrend against the yen in the days ahead.
While giving the inaugural testimony to Congress, the Federal Reserve Chairman Jerome Powell expressed confidence that inflation will reach the 2% target, even with rising interest rates, and pointed to the low unemployment rate of 4.1%. Powell also mentioned the small wage growth recorded in the recent quarter. Through his statement, Powell has clearly signaled a rate hike in March. Consumer spending accounts for nearly 70% of US GDP. Therefore, consumer confidence data has a high level of impact on the greenback.
The Conference Board Consumer Confidence Index increased to 130.8 in February, from 124.3 in January, and surpassed analysts’ expectation of 126.2. The Present Situation Index grew from 154.7 to 162.4, while the Expectations Index rose to 109.7 in February, from 104 in the prior month. The index is based on a probability-design random sample and is conducted for the Conference Board by Nielsen, a reputed global provider of information and analytics.
Likewise, the Richmond Manufacturing Index skyrocketed to 28 in February, from 14 in January, according to the data reported by the Federal Reserve of Richmond. It is the second-highest value on record, driven by an increase in shipments, employment and orders. While the wage index remained in positive territory at 23, the available skills index declined to -17 in February, from -10 in January. The decline indicates the difficulty in finding workers with suitable skills. On the contrary, the industrial production and retail sales data from Japan was far below the expectations.
Yesterday, the Ministry of Economy, Trade, and Industry (MEIT) reported a 6.6% m-o-m decline in the preliminary industrial production in January, from 2.9% growth recorded in the earlier month. Analysts expected a 4.1% decline in industrial production. On a y-o-y basis, industrial production grew 2.7%, versus 5.3% anticipated by analysts, and down from 4.4% growth recorded in the previous month.
The Ministry of Economy, Trade, and Industry also reported a retail sales growth of 1.6% y-o-y in January. This compares with a retail sales growth of 3.6% in December. The figures reported by MEIT also missed economists’ estimates of 2.3%.
Technically, the William Vix-Fix indicator has fallen from the recent peak. That means the USDJPY pair’s decline has ended for the time being. The rising moving average of the oscillator is also confirming an uptrend. Therefore, we can expect an uptrend to begin in the week ahead.
To gain from the uptrend, we may establish a long position in the USDJPY near 106.50, with a stop-loss order below 105.60. If the currency pair rises as expected, then we will dilute our long positions near 109.50.
Additionally, to take advantage of the analysis, we may also invest in a call option. While investing, we would choose a date around March 5th for expiry of the contract. The investment would be made only if the currency is trading near 106.50 in the Forex market.
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.
