Despite various Japanese ministers saying that Abenomics have been a resounding success, the underlying economic numbers seem to suggest otherwise. Latest Merchandise Trade Exports Y/Y came in at 3.8, higher than March’s 1.1 but way under mark versus analysts estimates of 5.4. Imports have grew much larger than expected, coming in at 9.4 vs a 6.9 forecast, and a large jump from previous month’s 5.6. The extreme growth seen in imports compared to the smaller jump in exports worsen April’s Trade Balance to a negative ¥879.9B, more than double that of previous month’s -¥364.0B and larger than the expected -¥620.6B.
The more than proportionate increase in imports versus exports suggest that a large of the increase in exports is purely due to the lower Yen – not actual sales quantity, but rather sales revenue due to the stronger foreign currencies converting to more Yen back home. The same applies to the larger than expected imports. If this trend continues, import prices will continue to increase and start to erode the benefits brought about by higher export earnings, and that would eventually hit higher inflation – the bad kind. When BOJ talks about inflation, Kuroda was surely wanting a demand driven inflation – higher demand deriving from higher wages deriving from stronger economy. However this kind of inflation due to higher import costs do not benefit Japanese. In fact, consumer consumption will be even lower due to mismatch of inflation vs wage gains, and put Japan into deeper recession.
What will this mean for USD/JPY then?
Yesterday we’ve suggested that Yen may be weakened further if Abenomics fail, and BOJ may end up having a runaway Yen train under its watch. Today is a sign of what weak Japan economics data can do – USD/JPY rallied slightly from 102.4 to 102.6 after the news release, showing that market is starting to place an emphasis on Japan’s fundamental once again after neglecting it in favor of BOJ’s promises all this while. Previously we were seeking clarity on the market’s interpretation of Japanese bad data – a sign that Abenomics not working – and wondered if bad numbers may draw stronger Yen due to safe haven/ loss of faith in BOJ ability to further weaken Yen. But it seems that market is currently more in line with traditional interpretation of fundamental data – weak data = weak currency – a good sign that rationality is entering back into the market.
From a technical perspective, 102.6 remains a tough nut to crack. Even though Stochastic readings are pointing up with current reading poised to break 50.0 and above the previous peak just a few hours ago, previous swing highs last week between 15 – 17 May will continue to pressure price lower even if we trade higher towards 102.8.Furthermore, from a weekly perspective, current price action still fit within the lower highs lower lows mold, which puts current downtrend firmly in play.
Historical Open Orders
OANDA’s Historical Open Orders shows that USD/JPY may enjoy some slight support between now and 102.0. However, price may also find resistance closer to 102.8 – 103, which suggest that price may continue trading sideways around where we are right now. This is plausible with Ben Bernanke scheduled to speak in Congress later tonight (morning US time). Should Ben come out all guns blazing, shooting down the recent hawks, we could potentially see a continuation of USD/JPY downtrend as USD may weaken quickly. However, this may not necessary translate to longer term bearish reversal especially seeing only buy orders below 101.5 and especially if Japanese economic figures remain less than encouraging. Furthermore, whether USD will ultimately weaken even if Ben Bernanke proved to be dovish is in doubt – as stock prices would most likely be driven higher, which may actually result in stronger USD and hence higher USD/JPY instead. Traders are advised to keep their eyes on market reaction rather than assuming that market will interpret fundamentals the same way as you do.