USD/JPY Forecast: Japan Trade Deficit Widens, Eyes on June BoJ Moves

The Reuters Tankan Index and Trade Data in Focus

On Wednesday (May 22), the Reuters Tankan Index and trade data from Japan put the USD/JPY in focus.

The Reuters Tankan Index remained unchanged at a value of 9 in May. Economists forecast a decline to 7. The Index avoided the negative territory, suggesting business sentiment toward the economy remained upbeat.

In April, the trade deficit unexpectedly widened from ¥366.5 billion to ¥462.5 billion. Economists forecast a trade deficit of ¥339.5 billion.

According to the Ministry of Finance, Exports advanced by 8.3% year-on-year in April, up from 7.3% in March. Furthermore, imports increased 8.3% year-on-year in April after falling 4.9% in March.

• Exports to China increased 9.6% year-on-year, with exports to the US up 8.8%.
• Imports from China advanced by 10.8% year-on-year in April, with imports from the US up 29.0%.

The economic indicators for April and May could attract the attention of the Bank of Japan. Speculation of a June BoJ interest rate hike has intensified in the weak Yen environment. An improving macroeconomic environment could fuel investor expectations of a June BoJ move.

Nevertheless, the BoJ may focus more on service sector activity, household spending, and demand-driven inflation. A weak Yen raises import costs, impacting household spending and demand-driven inflationary pressures.

Amidst rising investor bets on a June BoJ rate hike, BoJ commentary needs monitoring. Views on the economy, inflation, and the timing of an interest rate hike could move the dial.

US Economic Calendar: Fed Speakers and the Housing Sector

Later in the Wednesday session, existing home sales data from the US will attract investor interest.

Economists forecast a 0.5% increase in existing home sales for April, following a 4.3% slide in March.

The markets consider the US housing sector a litmus test of the US economy. An improving housing sector environment could bolster consumer confidence. Rising consumer confidence could fuel consumer spending and demand-driven inflation.

Furthermore, housing services inflation continues to attract the attention of FOMC members grappling with sticky inflation. A pickup in demand could further drive housing sector inflation trends higher and delay the timing of a Fed rate cut.

Beyond the numbers, investors should also track FOMC member speeches. FOMC members Raphael Bostic, Loretta Mester, and Susan Collins spoke early in the Wednesday Asian session.

Short-term Forecast

Near-term trends for the USD/JPY will hinge on the upcoming Services PMIs and central bank commentary. A pickup in service sector activity in Japan and weaker numbers from the US could impact buyer demand for the USD/JPY. The BoJ could consider the Services PMI numbers in discussions about a June interest rate hike.

USD/JPY Price Action

Daily Chart

The USD/JPY sat comfortably above the 50-day and 200-day EMAs, sending bullish price signals.

A USD/JPY return to the 157 handle could give the bulls a run at the 158 handle. A break above the 158 handle would support a move toward the April 29 high of 160.209.

On Wednesday (May 22), US housing sector data and central bank chatter need consideration.

Alternatively, a USD/JPY break below the 155 handle could signal a drop toward the 50-day EMA. A fall through the 50-day EMA would bring the 151.685 support level into play.

The 14-day RSI at 57.51 suggests a USD/JPY move to the April 29 high of 160.209 before entering overbought territory.