USD/JPY – Yen Surges on Strong Japanese Capital Spending

It had been a quiet start to the week for USD/JPY, but that ended on Wednesday, as the pair has posted sharp losses. USD/JPY is trading at 109.40. The yen has jumped as Japanese Capital Spending posted a gain of 4.2% in the first quarter, easily beating expectations. In the US, today’s key indicator is a key manufacturing indicator, ISM Manufacturing PMI. The markets are expecting a weak reading of 50.5 in the April report. On Thursday, the US releases two employment indicators – ADP Nonfarm Payrolls and Unemployment Claims.

The Japanese yen is back below the symbolic 110 line, following strong gains on Wednesday. The currency was bolstered by a 4.2% gain from Japanese Capital Spending in the first quarter, year-on-year. This figure was much stronger than the forecast of 1.9%. The higher than expected gain could lead to a revised Final GDP next week, which could bolster the yen. Elsewhere, Japanese Prime Minister Shinzo Abe announced that a sales tax hike would be delayed until October 2019. The sales tax hike had been scheduled to take effect in 2017. The weak economy has not responded to drastic easing moves from the Bank of Japan, and a tax hike could have pushed the economy into recession. The lengthy postponement is a blow to Abe’s economic platform, known as “Abenomics”, which has failed to deliver robust, sustainable growth to Japan. This economic platform is based on “three arrows” – fiscal stimulus, monetary easing and structural reforms. Abe has been in power for the past three years, but the Japanese economy continues to grapple with weak growth and deflationary trends. Weak global demand and sluggish consumer spending have compounded matters, as the economy continues to struggle.

Will the Fed raise rates in June or soon after? Recent comments by Federal Reserve chair Janet Yellen and other Fed policymakers have strongly hinted that a rate hike is on the table this summer. On Friday, Yellen said that if the US economy continued to improve, a rate hike would be appropriate in the “coming months”. This was followed by St. Louis Reserve President James Bullard, who said on Monday that global markets were “well prepared” for a summer interest rate rise, although he didn’t provide any specific dates. Odds of a rate hike in June have increased, but the Fed will be hard-pressed to raise rates if key indicators don’t show improvement, particularly inflation numbers. According to CME Group, traders have priced in a June rate hike at 28%, 60% for July and 68% in September. Market sentiment has strongly shifted towards the Fed raising rates, and this could boost the US dollar against its rivals.

USD/JPY Fundamentals

Tuesday (May 31)

• 19:50 Japanese Capital Spending. Estimate 1.9%. Actual 4.2%

Wednesday (June 1)

• 9:45 US Final Manufacturing PMI. Estimate 50.5
• 10:00 US ISM Manufacturing PMI. Estimate 50.5
• 10:00 US Construction Spending. Estimate 0.5%
• 10:00 US ISM Manufacturing Prices. Estimate 58.0
• All Day – US Total Vehicle Sales. Estimate 17.2M
• 14:00 US Beige Book

Upcoming Key Events

Thursday (June 2)

• All Day – OPEC Meetings
• 8:15 US ADP Nonfarm Employment Change. Estimate 177K
• 8:30 US Unemployment Claims. Estimate 270K

*Key releases are highlighted in bold

*All release times are EDT

USD/JPY for Wednesday, June 1, 2016

USD/JPY June 1 at 7:10 EDT

Open: 110.63 Low: 109.33  High: 110.83 Close: 109.42

USD/JPY Technical

• USD/JPY was flat in the Asian session but has posted sharp losses in European trade
• 109.87 is a weak resistance line
• 108.37 is a strong support level
• Current range: 108.37 to 109.87

Further levels in both directions:

• Below: 108.37, 107.57 and 105.87
•  Above: 109.87, 110.66, 111.30 and 112.26

OANDA’s Open Positions Ratio

The USD/JPY ratio is almost unchanged on Wednesday. Long positions retain a majority (59%), indicative of trader bias towards USD/JPY reversing directions and moving to higher ground.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.