The Japanese currency keeps a "finger on the pulse" regarding the topic of the spread of the new coronavirus. At the end of January, panic in the markets made it possible for the yen to strengthen to the 108th figure against the US dollar. But the protracted nature of the fight against the epidemic lowered the degree of glow, after which the USD/JPY pair became more susceptible to US events. However, the yen is still reacting to the news flow regarding the adversity called Covid-19.
During the Asian session on Wednesday, the USD/JPY pair showed impulsive growth and again entered the area of the 110th figure. Such price dynamics are due to two fundamental factors. Firstly, the statistics disappointed. According to published data, Japan has significantly reduced the volume of orders for machinery and equipment. In December, this indicator on a monthly basis fell to -12.5% (with a forecast decline to -9%). This is the weakest result since September 2018. In annual terms, the indicator also found itself in the red zone, dropping to -3.5% (with a consensus forecast of -1.3%). Such weak results correspond with the data on Japanese economy growth published on Monday.
The volume of GDP of Japan in the fourth quarter decreased at the highest rate in the last six years, following the increase in the consumption tax in the country. The indicator reached the level of -6.3% compared to the same period in 2018. The key indicator fell into the negative area - for the first time since the third quarter of the year before last. According to experts, the Japanese economy will also show negative dynamics in January-March this year, amid the spread of coronavirus. This scenario is very likely, especially given the decline in tourist flow in Japan. For example, last year, the Chinese accounted for 37% of the 44 billion dollars spent by tourists in Japan. But at the end of January, the Chinese government banned its travel groups from crossing the border. It is easy to imagine the consequences of such a decision for the Japanese tourism industry in particular, and for the economy as a whole.
As you know, a decline in GDP for two consecutive quarters means a technical recession. It is worth noting that in the fourth quarter of last year there was no "coronavirus factor" yet, but other circumstances slowed the growth of the Japanese economy. Among the main reasons, experts called the fact of an increase in sales tax, the consequences of the devastating typhoon Hagibis and weak global demand. For example, consumer spending in Japan suddenly plunged by 2.9% after the sales tax was raised in October (from 8% to 10%). Investments in business also slumped - this indicator decreased by 3.7% (with a projected decrease of 1.6%). Exports also showed weak dynamics amid the ongoing (then) trade war between the United States and China.
The coronavirus factor will be added to the above circumstances in the first quarter of 2020. In other words, the likelihood of a technical recession is quite high, as is the likelihood of a response from the Bank of Japan. After posting disappointing GDP growth data, Japanese regulator Haruhiko Kuroda reiterated the dovish intentions. According to him, if the epidemic continues to have a negative impact on the country's economy, "the Japanese central bank will immediately discuss options for further easing monetary policy."
Ironically, the coronavirus factor no longer supports the yen as a safe-haven currency. Despite the daily increase in deaths from pneumonia caused by the new coronavirus (the number of victims has so far increased to 2009), recent statements by WHO representatives are quite optimistic. For example, the head of this organization, Tedros Adhan Gebreyesus, said yesterday that the Chinese coronavirus causes only a mild illness in four out of five patients. He clarified that more than 80% of patients have a mild illness and recover, 14% have a serious illness, including pneumonia and shortness of breath, 5% have a critical illness, including respiratory failure, septic shock and multiple organ failure, and only 2% of cases are fatal. At the same time, the risk of death increases with age. In addition, according to recent data, the rate of spread of coronavirus is gradually slowing down, and almost all deaths are recorded in mainland China.
Thus, the defensive assets of the foreign exchange market ceased to "skim the cream" from the current situation, amid a decline in anti-risk sentiment. This also applies to the Japanese currency. The yen does not have its own arguments for its growth: recent macroeconomic reports and dovish comments Kuroda puts pressure on the currency. All this suggests that the prospects for the USD/JPY pair are completely dependent on the behavior of the dollar. If the minutes of the last Federal Reserve meeting (which will be published today) supports the greenback, then the pair can test the support level of 110.50 - this is the upper line of the Bollinger Bands indicator on the daily chart.
