Analysts’ Pick: Can the Dollar Yen retest its two-week low?
- Forex options signal that demand for risk haven assets are spiking, possibly as traders hedge against risk from Trump’s press conference later today
- Personal spending for April looks likely to sharply contract as a retail sales data suggests little spending despite increased personal saving rates in March
- Return in volatility suggests that there may be more downside for the Dollar Yen later today
Expect personal income and spending for April to experience one of the sharpest declines in history, possibly putting additional downward pressure on the dollar later today. The spike in unemployment signals that personal income will sharply contract in April as well. Personal income should be expected to contract much sharper on April than the -2% figure seen in March due to layoffs likely only peaking in April. Personal income may be slightly better-than-expected however, due to the loosening of rules governing benefit claims in certain states as well as from financial aid payments.
Personal consumption looks likely to face another historical contraction
Personal spending is likely to sharply contract as well, since retail sales data for April showed contraction across almost all types of businesses, including grocery stores. This implies that consumers may not have spent increased savings from reduced spending on travel and transport related expenses as well as entertainment expenses on other consumer discretionary categories. In addition, weaker-than-expected consumer confidence from both the Conference Board and University of Michigan also suggests that consumer spending may be worse-than-expected for April. Sampling error may be an issue this month however as a result of the number of businesses ceasing operations.
Plunging consumer confidence signals that consumers are less likely to spend during the month of April
The final revision for May's consumer sentiment index by the University of Michigan may see some slight upticks today as sentiment has likely improved over the month with all states in the US easing lockdown restrictions to varying degrees. This is evident from the performance in the US stock market, which has mostly gained over last two months (The S&P500 is currently trading 4.03% higher month-to-date). But the economists' estimates have likely already factored this in, signalling that financial markets should see little movement from the release of the dataset.
Volatility may start to return as Trump gets ready for a press conference to discuss China
The focus of the day should however, be on US President Donald Trump's press conference on China. No details were given regarding the press conference, but it is likely to be some form of response against China after Chinese lawmakers approved a national security legislation for Hong Kong. Earlier in the week, Trump has already signalled that a response from his administration can be expected later in the week. US Secretary of State Michael Pompeo's announcement that the US can no longer reasonably acknowledge that Hong Kong is politically autonomous from China also supports the notion that US is likely to respond during the press conference since denouncing Hong Kong's political autonomy from China opens up the option of US sanctions on Hong Kong. Trump may use this to pressure China for both political and economic reasons, even with the phase one agreement signed. However, as previously mentioned, the global economic situation implies that both the US and China is unlikely to fully walk away from the phase one trade deal. This means that while there will likely be more upside for safe haven assets later today. The greenback has been falling since Trump announced his plans for a press conference on Thursday. Yen and gold have instead shown strength.
Dollar Yen and gold’s reproaching inverse correlation signals that demand for safe haven assets is increasing
The likely reason for this is that traders are unwinding position for profit taking and buying the yen instead to hedge against risk following Trump's announcement since it seems likely that any comments on sanctions regarding China or Hong Kong is likely to put pressure on commodity-related currencies as well as equity prices. Spiking implied volatility for the Dollar Yen helps supports this theory as well, as the one-week implied volatility for the Dollar Yen rising from 0.87 vol to 5.58.
Coupled with potentially weaker-than-expected data in the US for April, the Dollar Yen may fall to 106.83's level, i.e. a downside potential of approximately 0.47%. However, upside risks will be in the event that Trump does not comment on possible sanctions on China, which may potentially spark a selloff for the yen and a shift back into riskier assets.
Technical indicators signal that the Dollar Yen has started a downtrend cycle and has additional room to fall before being oversold. RSI is still above 30 and may be able to go deeper into oversold region if Trump gives any negative signals in regards to US-China relations at his scheduled press conference. The support at 106.832 however, may be broken if consumption and income data in the US is worse-than-expected. USD/JPY is then likely to fall break past 106.83’ level and continue to fall towards 106.00’s level as a result. Bulls looks unlikely to break the resistance today, as reports from Bloomberg that leveraged funds were shorting the currency pair is likely to weigh on long positions.
Support: 106.83 / 106.46 / 106.00
Resistance: 107.42 / 107.76 / 108.09
USDJPY Chart (H4)