Yen Vulnerable Against Dollar Amid Chinese Economic Challenges

Asian currencies experienced declines on Tuesday, driven by Chinese service sector data indicating challenges for the region's largest economy.

Japan's household spending saw its most substantial decrease in almost two and a half years due to rising prices, although volatility in specific items suggests that the overall outlook may not be as bleak as the headline figures suggest.

Japan's economy, on the other hand, exhibited a much faster growth rate than expected in the second quarter. This growth was attributed to the easing of COVID-19 restrictions and a resurgence in inbound tourism. While spending on dining out, transportation, culture, and entertainment services increased due to a higher number of people going out, declines were observed in various areas such as food and housing. Analysts anticipate that private consumption will continue to support overall growth, even in the face of weak global demand.

Japan's core consumer price index, which excludes volatile fresh food prices but includes oil products, registered a 3.1% increase in August, following a 3.3% rise in the previous month. This index has consistently exceeded the Bank of Japan's 2% inflation target for 16 consecutive months. Experts anticipate that private consumption will continue to recover as economic activity normalizes and real wages decline less significantly.

A private survey supported this view by revealing that Japan's service sector activity expanded at its fastest pace in three months in August, primarily driven by robust consumer spending and the resurgence of inbound tourism. This positive performance in the service sector contrasts with the contraction in the manufacturing industry and subdued business sentiment due to slowing global demand. Additionally, employment in the service sector strengthened, driven by increased demand and confidence among service providers.

While business expectations remained strong, input prices experienced a rapid increase, rising at the fastest pace since February. This increase was attributed to soaring raw material, fuel, and electricity costs.

However, Japan's economic output exceeded full capacity in April-June for the first time in nearly four years, indicating potential conditions for ending its policy of ultra-low interest rates. Prime Minister Fumio Kishida acknowledged the significance of this data but noted that the margin of increase remained small and emphasized the importance of sustaining this trend.

A positive output gap, along with wage growth and price expectations, are identified as inflation drivers by Japan's central bank. The removal of COVID-19 restrictions and the spending of accumulated savings during the crisis have stimulated consumer demand, typically leading to upward pressure on prices.

On the other hand, Japan's top currency diplomat, Masato Kanda, issued a warning against speculative moves in the yen and stated that Japanese authorities would consider various options on currencies if such moves persisted. This warning followed a period of yen weakness against the dollar due to diverging monetary policies between the Federal Reserve and the Bank of Japan.

Meanwhile, the U.S. dollar maintained near three-month highs as several Federal Reserve speakers are scheduled to provide insights on monetary policy. Despite signs of cooling economic activity, the dollar displayed resilience.

Moreover, the dollar's strength was driven by concerns over global growth, particularly in China, where disappointing services activity data had a negative impact on risk-taking sentiment. China's services activity expanded at its slowest pace in eight months in August, with the Caixin services purchasing managers' index falling short of expectations. This development led traders to seek safety in the U.S. dollar, pushing the dollar index close to its highest level since early June.

As the U.S. market resumed activity following a public holiday, attention is directed towards further guidance on monetary policy ahead of a highly anticipated meeting in September. The expectation was that the U.S. central bank would maintain steady interest rates while reaffirming its intention to keep rates elevated for an extended period. Hence, it is anticipated that the yen will fluctuate within the range and exhibit some relative weakness against the U.S. dollar, provided there is no interference from Japanese authorities and substantial speculative buying by investors. Nevertheless, the anticipated decline or devaluation of the yen is projected to be somewhat constrained.

Data for Technical Analysis (5H) CFD USD/JPY

Resistance : 147.82, 147.93, 148.10

Support : 147.48, 147.37, 147.20

5H Outlook

Source: Investing.com

Buy/Long 1 If the support at the price range 147.38 – 147.48 is touched, but the support at 147.48 cannot be broken, the TP may be set around 147.93 and the SL around 147.33, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 147.82 – 147.92, TP may be set around 148.10 and SL around 147.43, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 147.82 – 147.92 is touched, but the resistance at 147.82 cannot be broken, the TP may be set around 147.48 and the SL around 147.97, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 147.38 – 147.48, TP may be set around 147.20 and SL around 147.87, or up to the risk appetite.       

Pivot Points Sep 06, 2023 02:57AM GMT

Sources: Investing 1, Investing 2