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USD/JPY starts out on the backfoot, technicals supporting bearish outlook

  • USD/JPY has started out the week on the backfoot following a risk-off end to last week whereby equities in the US fell over 2%.
  • The dollar was mixed overall although yields were down 3-5bps across the curve with non-farm payrolls that came in weaker than expected with earnings also slowing. 

The US payrolls growth cooled in November with the economy producing 155k jobs in the month. This came in below the expectations at 198k. The detail was mixed; jobs growth in the prior two months was revised down -12k while average hourly earnings grew less than expected (0.2% vs consensus 0.3%). Against that, the annual growth rate for earnings held up at +3.1%, while unemployment held near 40-year lows of 3.7%. 

The yen can stay bid on slowing global growth and tariff wars, Brexit, Italy’s budge and as analysts at ANZ point out, now investors have something else to watch and worry about:

"The case being made against Huawei CFO Meng Wanzhou. The US alleges that an unofficial subsidiary was used to circumvent US and European sanctions on Iran. Banks clearing money for Huawei were unaware that they were contravening sanctions, the charge alleges. The arrest has angered China, with Huawei a flagship success story at the forefront of China’s ambitions to become a high-tech superpower, more independent of the US. It will be a long, slow process before the decision is made on whether Meng should be sent to the US to stand trial. And then there could be appeals. But in the meantime, markets are assuming the resulting ratcheting up of tension between the US and China makes it less likely a trade truce will be agreed, for all that Trump tweeted over the weekend that talks were “going very well”. Semi-conductor stocks in particular are under pressure."

Looking ahead

The next data event on the list comes with US CPI. "We expect headline CPI to slip to 2.2%, largely on the oil price rout which left gasoline prices down nearly 8% m/m. Beyond the energy weakness, food prices have scope to jump. We also expect a solid 0.2% print on core CPI on a pickup in core services, leaving the y/y rate higher at 2.2%. Strength in the core following prior weakness reinforces an upbeat report," analysts at TD Securities argued.

  • Support levels: 112.20 111.90 111.60
  • Resistance levels: 112.80 113.10 113.40

Valeria Bednarik, Chief Analyst at FXStreet explained that from a technical point of view, the daily chart indicates that the downside remains limited:

"The Momentum indicator heads marginally higher around its 100 level. The RSI, however, heads lower around 43, reflecting the absence of buying interest. In the 4 hours chart, the risk is skewed to the downside, as the pair is developing below its 100 and 200 SMA, both converging around 113.10, while technical indicators head lower in negative ground after a failed attempt to surpass their midlines. "

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