The USD/JPY crashed through support at 106.00 that had held since the early days of the pandemic, following the EUR/USD which broke its range two weeks ago, then took out 105.00 on Wednesday but comments from the Ministry of Finance on Friday and some sensible week end and month end profit taking sent the pair racing higher with the biggest moves coming in the London and New York market.
Treasury rates helped underpin the USD on Friday as the 10-year moved four points higher to 0.543% and the 2-year gained 2 to 0.144%
After touching 104.19 in Asia the USD/JPY bounced as high as 104.70 before falling to 104.55 then surging higher in the London afternoon–New York morning. The most sustained move was through band of resistance at 105.20-105.30 that carried on to 105.50.
The prior low of 106.00-106.10 which held from early March through Monday is the now the first resistance followed by 106.50, 106.75, 107.00, 107.25 and 107.50. The lines are close as that area was continually traversed from April through the end of July with tight trading ranges and multiple tops and bottoms.
A Ministry of Finance (MOF) comment in Tokyo that ‘forex stability is important,” standard code for the levels are of concern was later seconded by MOF head Taro Aso who noted that strength in the currency didn’t correspond with trade balance shifts.
That the bottom for the Japanese economy, depending on the statistic, came in April or May, was confirmed this week but so was the improvement into the summer.
The Coincident Index which puts the general state of the economy in one number came in at 73.4 in May, below the 74.6 forecast and down from April’s 80.1. It was the weakest score since the financial crisis.
Leading economic indicators in May slipped to 78.4, missing their predictions of 79.3 and like the Coincident Index above the lowest reading since the financial crisis and its immediate aftermath.
Retail trade, the accounting from the sales side, jumped 13.1% in June, more almost double it 7.1% estimate after May’s 2.1% gain. Consumers have more than covered the March-April loss of 14.4% with 15.2% in May and June.
Sales at large retailers fell 3.5% in June about one-third of the expected 12.3% loss. Purchases have yet to recover from the string of declines that started in March at -10.1%, and continued with -22.1% in April, and -16.7% in May
The jobs to applicants’ ratio slipped to 1.11 in June, the lowest since November 2014. The unemployment rate fell to 2.8% in June from 2.9%. It had been expected to rise to 3.1%.
Industrial production more than doubled its 1.2% forecast in June at 2.7%. It was the first gain in four months after-8.9% in May, -9.8% in April and -3.7% in March.
Housing starts dropped 12.8% in July slightly better than the -13.7% projection. Consumer confidence in July rose to 29.5 from 28.4 in June missing the 32.7 estimate. April’s 21.6 score was the lowest on record.
Statistical evidence for the recovery from the March and April closures accumulated but markets have already moved to the concern, evident in the currencies over the past two weeks, that the US will be unable to sustain the momentum and might slip into further decline, especially in jobs.
Durable goods rose 7.3% in June adding to May’s 15.1% burst though they are still lacking the combined 35% drop in March and April when the economy was shuttered. Goods ex-transport climbed 3.3% in June and 3.6% in May, as the overall they are still down on the 10.1% loss in the prior two months.
Non-defense capital goods ex-aircraft, the business investment proxy, rose 3.3% in June better than the 2.3% forecast, but May was reduced to 1.6% from 2.3%, leaving them recovered 4.9%, a bit over half the 7.9% drop in March and April.
The FOMC meeting on Wednesday produced no new policy or analytical information. Yield curve control, the targeting of specific long-term rates was not mentioned. Chairman Powell was realistic about the challenges facing the economy and noted again that the course of the virus defines the success of the recovery.
Second quarter GDP set its expected record at -32.9% annualized, a trifle less than the -34.1% forecast. The US is now officially in recession after -5% in Q1. The Atlanta Fed’s GDPNow model posited 11.9% in the third quarter in its first estimate.
Initial jobless claims rose to 1.434 million for the second straight weekly gain dramatizing the worry that the higher virus case counts in many states will inhibit the recovery. The low for claims was 1.307 in the week of July 10. Continuing claims jumped to 17.018 million on July 17 from 16.15 million.
Personal spending in June, properly personal consumption expenditures (PCE) rose 5.6%, 5.5% had been forecast. After the May increase of 8.5% the combined gain of 14.1% remains below the shutdown loss of 19.5%.
Core PCE prices, the Fed’s inflation gauge, climbed 0.9% in June following May’s 1% increase. It is down from 1.8% in February.
The diving dollar of the past two weeks is most directly related to the fear that a revived pandemic will reverse the gains of the US economy since May. This view will be as short-lived as the panic in early March.
As nations reopen their economies the increase in Covid exposure and cases, though not to any great degree hospitalizations and fatalities, is inevitable. It is not a function of public health policy but a measure of the contagion of the virus.
A number of countries who had previously seen very low case numbers, Japan, Hong Kong in Asia and Spain in Europe have seen their case load rise again. The same has been true in several US states. In Texas and Florida among the earliest to reopen positive tests have begun to fall along with hospitalizations. The vast majority of what are referred to as ‘Covid cases’ are simply positive test results for exposure many with few or no symptoms.
As the incidence of the virus evens out the potential economic impact will also. What has been seen as a particular US problem for several weeks will become a generalized global issue. The differential extracted from the dollar for its nation’s supposed recklessness will reverse as the pandemic playing field tilts the other way.