After starting the week with sharp losses, the Japanese yen has settled down. In the European session, USD/JPY shows limited movement, trading at 138.66.
Japanese Data Improves
Japan posted solid numbers today, as retail sales and industrial production improved in July. Retail sales climbed 2.4% YoY in July (vs. 1.5% in June), above the forecast of 1.9%. Significantly, household spending stayed strong, despite high inflation due to rising energy and food prices.
Industrial production surprised with a gain of 1.0% MoM (vs. -0.5% forecast), after a huge 9.2% gain in June. Two months of gains point to strong pent-up demand and an easing supply line disruptions. The consumer confidence index also rose to 32.5 in August (vs. 31.0), up from 30.2 in July. Consumer confidence remains weak, but the index improving for the first time in three months is welcome news.
The host of positive numbers indicates that the Japanese economy, although fragile, continues to recover, primarily due to pent-up demand following the easing of Covid restrictions. Still, the economy has a long way to go before the Bank of Japan will join its counterparts and tighten policy.
The BoJ is primarily focused on stimulating the economy, and inflation remains much lower than what we’re seeing elsewhere. With the BoJ vigilantly maintaining its yield control, the Japanese yen remains at the mercy of the US/Japan rate differential, and higher US yields of late have pushed USD/JPY close to the 139 level. We could see the yen fall to 140 in the short-term, with no indication that Japan’s Ministry of Finance has any appetite to intervene and support the yen.
Later today, the US releases the ADP Employment report. The market consensus for August stands at 288k, which would be a strong improvement from the July gain of 128k. This event could cause brief volatility in the dollar, but it is not a reliable indicator for Friday’s non-farm employment report. NFP is expected to fall to 300k, down from July’s massive gain of 528k.
USD/JPY Technical View
- USD/JPY is testing support at 1.3822.
- The next support line is at 137.01.
- 1.3891 and 1.4012 are resistance lines.
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