Following the March’s 1,6% YoY increase in the services sector PPI, April’s reading of 1.0% against 1.2% expected does not come as a surprise to anyone. Similarly, a significant fall of 3.8% in the industry activity index of Japan is a reflection of Covid-19 caused slowdown that puts pressure not only on the Japanese economy but the entire economic activity of the region and the world. With this respect, one should not expect the upcoming data, either from Japan or US, to surprise investors in a positive sense, as investors tend to assess which economic data is less negative.
Investors nowadays trade the interaction between the virus and the governments. The latest data show a slowdown in infections and death toll, leading the governments around the world to desperately open economies and avoid further tax income losses. Stock markets maintain a positive mood in response to increasing money supply and the optimism that Covid-19 caused economic environment might improve. Furthermore, investors trust that governments will provide fiscal support down the road. All these expectations cause stock markets to rise even further and the US Dollar to remain strong against other currencies including Japanese Yen.
Although in the short term, US Dollar has further room to rise against the Yen, as markets begin to realize that the governments may be more reluctant than willing to provide fiscal support, all things that moved in one direction in the last few weeks might start to move in the opposite. Besides, when fiscal stimulus is considered in the face of the US budget deficit, whether or not the Federal government will ever be able to supply fiscal support is to be questioned by investors. For now, USDJPY is a buy on dips. However, a move towards 108.30s may trigger fund offerings of US Dollar against the Yen and stabilize the pair, especially if today’s US economic data, manufacturing surveys, and consumer confidence, show weaknesses ahead.