Weak economic data is highlighting the need for Japanese stimulus, reports Joe Perry.
On Monday, we wrote about how Japan’s GDP for Q4 was down 6.3%, much worse than the expectation of -3.7%. The data was horrible. Yet, the Japanese yen barely moved on the release, as markets know that the Japanese government will come in and save the day.
Japan’s data hasn’t mattered for years now. However, enter concerns about the Coronavirus. Japan has seen a recent increase in the number of new cases, now over 600. This is the largest amount of people with the virus outside of China (many of the cases were from the cruise ship Diamond Princess, which was quarantined at port in Japan). But Japan doesn’t want to take any chances. They have shut down events which would have large public attendance in order to stem contagion of the virus. In addition, Japans’ health ministry issued guidelines for people exhibiting symptoms of the Coronavirus.
With GDP at -6.3%, officials may already have to provide more stimulus. If there is a slowdown in economic activity because of the virus, things can get even worse. Tokyo is scheduled to host the 2020 summer Olympic games! It would be a devastating blow to the economy if the games needed to be canceled. But just the implementation of precautionary measures plus general fear could have a negative economic impact with fewer spectators traveling to the games.
Today’s price action in the JPY pairs is particularly interesting. Yen pairs having been going bid all day. However, correlated assets such as gold and the U.S. dollar were also going bid, and equity indices were moving lower. As of the time of this writing, stocks look to be heading higher, perhaps restoring some order to the normal correlations.
The USD/JPY pair is up nearly 100 pips on the day close to 110.80, after breaking through strong resistance at 110.30. This was a confluence of resistance, including the break of a trendline, which dated all the way back to June 2015. The next resistance level is the top trendline of the rising channel from August 2019, near 111.50. Support is back near the breakout point at 110.30 (see chart).
Source: Tradingview, FOREX.com
The euro/yen pair (EUR/JPY) is also up nearly 100 pips, close to 119.50, however due to the weak euro over the last few weeks, the pair is rising from depressed levels. EUR/JPY had pulled back to the 61.8% Fibonacci retracement level from the lows on Sept. 3, 2019 to the highs on Jan. 16 at 118.50. However, there is resistance near 119.60, then the 200-day moving average at 120.40 and previous highs at 121.15. Support is at the day’s lows near 118.55 (see chart).
Source: Tradingview, FOREX.com
Whether Wednesday’s move in the Japanese yen pairs are due to a stop run/short squeeze, a delayed reaction to poor data, or fears of the Coronavirus, doesn’t matter. The reality is that the yen is moving higher. We need to look for confirmation in other correlated asset classes to determine if the move is real. If it is, we should see stocks continue higher, while gold and the Dollar Index move lower. Keep an eye on these assets for conviction.
Joe Perry holds the Chartered Market Technician (CMT) designation and has 20 years of experience in the FX and commodities arenas. Perry uses a combination of technical, macro, and fundamental analysis to provide market insights. He traded spot market FX and commodity futures for 17 years at SAC Capital Advisors and Point 72 Asset Management.
