Inflation returns with a vengeance
- The surprise of the US CPI reverses the fall in Treasury rates.
- USD / JPY increases one digit as US inflation far exceeds expectations.
- BOJ’s Kuroda warns of continued economic weakness.
- The Federal Reserve believes that monetary policy should remain unchanged.
- FXStreet forecast poll predicts USD / JPY decline in second quarter.
The US dollar has been indebted to the bond market all year.
The rise in Treasury interest rates, helped by inflation on Wednesday, although well within this year’s range, was enough to give the USD / JPY its best session since the start of last November.
The dollar yen opened at 108.62 and traded at 108.76 when the US Consumer Price Index (CPI) was released for April.
The annual prize win has attracted attention. At 4.2%, the increase was 0.6% from the consensus forecast of 3.6% and a jump of 1.6% from the March rate of 2.6%.
In the first three hours of Census Bureau data, the USD / JPY rose nearly a significant figure to reach 109.54, its highest trade in a month. The pair ended the day at 109.67, the highest close since April 9.
Consumer inflation in the United States has tripled in four months from 1.4% in January and its impact is being felt across a wide range of products. Wages rise as employers try to get workers to return to their jobs. Markets had anticipated a sharp rise in annual inflation, as the base effects of last year’s lockdowns trickle into the data. With commodity prices soaring and raw material and component shortages spreading, traders were wary that more than just statistical variation was at work. This suspicion has been confirmed.
Treasury rates rose sharply after the release of the CPI. The benchmark 10-year yield increased 7 basis points from 1.625% to 1.695%, the 5-year and 30-year yield increased 6 points each to 0.864% and 2.415% respectively.
Only the 2-year, pinned by the $ 120 billion in bond purchases per month by the Federal Reserve, fell by less than a point from 0.163% to 0.167%.
10-year US Treasury yield
Treasury rates returned some of their gains on Thursday, the 10-year lost just under 3 basis points to 1.668%, and continued to decline on Friday. USD / JPY followed the credit lead, falling to 109.48 on Thursday and trading at 109.36 early in action on Friday.
US retail sales for April on Friday were disappointing, lying flat on expectations of a 1% increase, although March almost made up the difference as it was revised to 10.7% from 9 , 8%. The control group slipped 1.5% in April. The forecast was for a loss of 0.2%. The March result was revised significantly upwards from 6.9% to 7.6%.
Japanese data had little impact on the market.
The April Eco Watchers survey in Outlook and Current was considerably weaker than expected, reducing the prospects for a domestic recovery.
Bank of Japan Governor Haruhiko Kuroda did the yen no favor when he warned of the continued impact of the pandemic in Japan, pledging to maintain the bank’s accommodative monetary policy.
“Economic activity will remain below pre-pandemic levels for now,” Kuroda said. “The risks to the economic outlook are on the downside.”
The Japanese economy likely contracted in the first quarter and any rebound in the second is expected to be modest given new pandemic restrictions on activity that will limit consumption. The first quarter GDP will be released on May 17.
USD / JPY Outlook
The link with US interest rates remains paramount for the USD / JPY. Any appreciable upward or downward movement in Treasury yields will be reflected in the pair.
The Federal Reserve continues to insist that no policy change is warranted.
“We’re still a long way from our goals, and in our new framework, we want to see real progress and not just forecast progress,” Vice President Richard Clarida said in an interview with CNBC.
Despite the Federal Reserve’s repeated assertion that surging consumer inflation is a temporary phenomenon, the combination of wage pressures, material shortages and consumer demand is worrisome and not on its way. to dissipate soon.
Like the Fed, the markets are interested in the real performance of the US economy.
Inflation has returned to the fore. The forecast producer price index for April, as the CPI, was much stronger than expected at 6.2%, and will continue to focus on price changes.
The Japanese statistics are, somewhat unusually, more important in the coming week than those of the United States. Q1 GDP is expected to contract an annualized 4.6% on Monday, something worse will damage the yen. The national CPI on Thursday is expected to show continued annual deflation, the steeper the decline, the greater the pressure on the BOJ and the lower the yen.
Technically, the USD / JPY is well supported at 109.35, the base of the head-and-shoulders pattern from late April to mid-March, then at descending intervals to 108.50.
The USD / JPY contest lies between evidence that the U.S. economy and inflation are strengthening and their impact on U.S. interest rates relative to the downtrend when that evidence is lacking.
The bias is higher given the interest rate advantage of the US dollar, but momentum is weak due to the uncertainty of US economic data.
Japanese statistics from May 10 to 14
US statistics May 10-14
Japanese statistics from May 17 to 21
First-quarter annualized GDP is the largest with another recurrent Japanese contraction expected. The national CPI is expected to be deflationary for the third consecutive month. No statistics as expected will help the yen.
US statistics May 17-21
The US housing permit and housing market on Tuesday and existing home sales on Friday are expected to continue to burn. The scarcity of new housing, especially low-cost inventory, is a major component of asset price inflation.
USD / JPY technical outlook
The rebound from the Fibonacci level of 38.2% at the end of April remains the main technical limit. USD / JPY has not closed below 108.60 support since the rally on April 27, and Wednesday’s rise was encouraged by its start at that important level. The immediate support line at 109.35 is the basis for head and shoulder training from March 26 to April 12. The first resistance at 109.70 is moderately strong as it is based on several days of trading. The others above are tenuous and wouldn’t block fundamentally higher movement.
The USD / JPY is likely to move sideways in a band of 108.60 -109.85 until there is a disposition of inflation and growth in the United States, although the GDP Japan’s weaker than expected first quarter could push the pair higher.
The Relative Strength Index (RSI) at 56.61 is a buy signal. The 21 day moving average (MA) at 108.76 fronts supports at 108.60. The 100-day MA at 106.90 and the 200-day MA at 105.96 are irrelevant.
Strength: 109.70, 109.85, 110.15, 110.35, 110.75
Supported: 109.35, 109.00, 108.60, 107.90, 107.00
FXStreet Forecast Survey
The uniformly bearish views of the FXStreet forecast poll are based on an early retracement of Wednesday’s rise. While this is a standard technical answer, it is less applicable here given the fundamental nature of recent gains.