JP CPI misses whilst employment continues to strengthen

It has been a big data week for Japan, with today finishing off with an array of inflation, consumer and industry reads.

Household spending contracted by -2% MoM to break a 2-month expansion and print its worst month since last August. The annual rate has contracted a further -1.3%, making it the 14th month in the red. Until household spending picks up then any inflationary pressures are unlikely to be sustained for long, as the consumer refrains from spending after being stuck with a deflationary mindset for decades. That said, retail sales managed to pick up by 0.2% MoM and expand by 2.1% YoY, its highest since June 2016 so there is clearly some spending going on somewhere.

Industrial production declined by -2.1% MoM to bring the annual rate to 3.3%. The underlying index has been moving steadily higher since mid-2016 so the annual read is not down to a basing effect, which many of the inflationary reads have been. So, whilst there is a near-term weakness from this read, there is potential for it to remain supported in the moth ahead if the underlying index does not move down much lower.

Unemployment remained at 2.8%, its lowest rate of unemployment since 1994. Taking a monthly % change of unemployment, the 1yr average is -1.1% per month and the underlying trend points to continued strength for Japan’s employment sector. The jobs/applicant’s ratio, which moves inversely to unemployment is also at multi-year highs.

EURJPY has stalled below a shallow, sloping resistance line and is taking a pause after gapping higher on Monday. We believe this is a breakaway gap, which now assumes there are more gains to follow. The prior two candles have provided a shooting star reversal of some sort to warn of near-term weakness, yet as the volatility of these candles is small compared to the preceding green bar then we see this as a minor pullback before gains are to be resumed.

We could seek for support to build above the monthly pivot before considering a long position. As we do not consider the sloping red line as key resistance (merely a temporary setback) then we could consider a bullish position to anticipate the bullish break.

The yield differential between EU and JPY are not warning of an over-extended move and their correlation with EURJPY remains tights. This is not the case with other pairs such as GBPJPY and USDJPY which suggest the spot markets may need to correct. The interim target is 124 resistance but as we are becoming more bullish on Euro, then we think this too will break to the upside.

Matt Simpson | Senior Market Analyst

A certified technical analyst, combining macro themes, monetary policy and business cycles to generate Forex and commodity trade ideas.

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