USD/JPY Outlook Jan 28-Feb 1

Yet again,  dollar/yen  began the week with some consolidation, but eventually ended it with a weekly gain. Will this pattern continue?  Retail Sales, Prelim Industrial Production m/m and housing data are the major events this week. Here’s an  outlook  for the Japanese events and an updated technical analysis for  USD/JPY.

Last week, The Bank of Japan announced its strongest measure yet to end years of economic sloth, decided on an open-ended commitment to buying assets next year and double its inflation target to 2.0%. The BOJ promised to reach the inflation goal “at the earliest possible time.” to overcome nearly two decades of lingering deflation. Will these efforts prove effective?

Updates: The Corporate Services Price Index declined by 0.4%, a notch above the estimate of 0.5%. Japanese inflation indicators continue to point to a deflationary trend in the economy, despite the aggressive efforts by the government to combat deflation and kick-start the economy. Retail Sales will be released later on Tuesday. The markets are bracing for a much weaker release than the November reading, which posted a 1.1% gain. USD/JPY was trading at 90.46. Manufacturing PMI rose to 47.7 points. The index has not broken the 50 level since last May. Average Cash Earnings declined by 1.4%, well below the estimate of 1.1%. It was the indicator’s second straight decline. Housing Starts climbed 10.0%, but this was well off the forecast of 13.6%. The yen was testing the 91 line, as USD/JPY was trading at 90.96.

USD/JPY  daily chart with support and resistance lines on it. Click to enlarge:  

1. CSPI: Sunday, 23:50. Japan’s corporate services price index improved more-than-expected in November reaching -0.4% following -0.7% in October while analysts expected a rise to -0.6%. A decline to -0.5% is expected now.
2. Retail Sales: Tuesday, 23:50. Japanese retail sales dropped unexpectedly by 1.3% in November following a 1.2% decline in the previous month. The rise was broadly in line with predictions. Japan’s weak economic condition badly effects consumer spending. A 0.4% gain is forecasted.
3. Manufacturing PMI: Wednesday, 23:15. Japanese manufacturing activity  declined in December at the fastest rate in more than three  years, reaching 44.5 after posting 46.5 in November amid domestic recession and weak external demand. Economists expect Japan’s gross domestic product to shrink  in the fourth quarter.
4. Prelim Industrial Production: Wednesday, 23:50. Preliminary Industrial production in Japan dropped a seasonally adjusted 1.7% in November, much worse than the 0.5% decline forecasted and following a1.6% gain in the previous month. General machinery, fabricated metals and electronics equipment registered gains while cellular phones, transmission parts and steel bridges declined.  A climb of 4.2% is expected this time.
5. Housing Starts: Thursday, 5:00. Housing starts in Japan rose 10.3% in November from a year earlier, rising for the third consecutive month, partially amid rising demand prior to possible sales tax hikes and also because of reconstruction in areas hit by last year’s earthquake and tsunami. Another rise of 13.6% is anticipated.
6. Household Spending: Thursday, 23:30. Average consumer spending in Japan was increased 0.2% on a yearly base in November, much lower than the 0.7% increase predicted, following a 0.1% decline in the previous month. Spending on education, furniture, housing and food contracted, while transportation and clothing increased.- A small gain of 0.1% is forecasted.

*All times are GMT.

USD/JPY  Technical Analysis

Dollar/ ¥ began the week with a slide and bottomed out around 88. It then changed course and made an upwards move once again, this time convincingly conquering the 90 line (mentioned last week). After reaching 91.20, USD/JPY closed at 90.89.

Technical lines from top to bottom

High the sky, we find the 97.80 line, which was a peak back in 2009. This is a high level that could be targeted if 95 is breached. A very important line is 94.70 – which capped the pair for long months in early 2010.

92.12 worked in both direction in 2009 and 2010. These are still in the distance at the moment. 91.20 is a peak in January 2013 and is minor resistance now.

The ultimate support line for now is 90 – a target marked by many analysts and a round number. This line remains close after the break. Just below, 89.67 capped the pair for several days in January 2013 and is now immediate support.

Below, 89.10 was a peak in the summer of 2010, before the pair began descending and is now support. 88.40 is the peak of January 2013 and is immediate resistance at the moment.

Below, 87.60 provided support on a pullback when the pair traded higher in January, after previously working as resistance. 86.27, which served as resistance, also in 2010 is weakening now.

85.50 is a high peak seen back in early 2011 and remains important support now. 84.20 is a more recent swing high, seen in early 2012. This is now critical resistance for any move forward.An initial move above this line in December 2012 turned into a false break.

It is followed by 83.34 which capped the pair in April and also beforehand. It switched to support after the surge in December. 82.87 is a veteran line – that’s where the BOJ intervened for the first time back in 2010. The line also capped the pair during November and December 2012.

Another Recent Technical View:  USD/JPY Steep Uptrend Pulls Back to Key 88.00 Support  – by James Chen.

I turn from bullish to neutral on USD/JPY.

After conquering the 90 line, the pair could enjoy some consolidation before moving onto the next levels. The growing talk of a currency war, especially from Angela Merkel, could temporarily scare some of the yen bears and limit future moves. In the longer term, the improving US situation and the determination of the Japanese government to stimulate exports will likely lead to further gains by USD/JPY.