USD/JPY Outlook March 4-8

USD/JPY had an exciting week, reaching out to new highs only to take a big dive and then to recover once again. Is the safe haven trade ending the yen’s fall? Or is it just a bump on the road? The rate decision and Current account are the major events this week. Here’s an  outlook  for the Japanese events and an updated technical analysis for  USD/JPY.

The news about the nomination of Haruhiko Kuroda as the head of the BOJ hurt the yen, as he is considered dovish. However, the political mess in Italy raised the demand for the yen and the dollar – the safe haven currencies. EUR/JPY plunged 600 pips within a few hours.    Japan’s retail sales plunged 1.1% in January, for the first time in three months amid snow storms keeping shoppers away from retail stores. However Household Spending was unexpectedly strong in January climbing 2.4% following a decline of 0.7% amid weaker yen improving consumer sentiment. Will consumer spending continue to rise this year?

Updates: Monetary Base was up sharply, rising to 15.0%. This was well above the estimate of 11.5%. Average Cash Earnings climbed 0.7%. The markets had expected a 0.3% decline. Haruhiko Kuroda, who is  the  nominee for  governor of the BOJ, testified at a confirmation hearing in Japan’s lower house of
parliament. Kuroda said that he would not set limits on the
amount of funds the BOJ would inject into the economy, and that the BOJ’s current policies were not strong enough to boost
inflation to the government’s target of 2%. Kuroda suggested that the BOJ
consider  starting its open-ended asset purchases  prior to  the scheduled start of
2014. He  emphasized that the BOJ is not targeting the yen, which has plunged in value and become a source of friction with Japan’s trading partners. USD/JPY was steady, as the pair was trading at 93.09. There were no surprises from the BOJ, as it maintained interest rate and AE levels. The BOJ kept  the benchmark interest  rate at <0.10% and QE at 76 trillion yen. Leading Indicators came in at 96.3%, very close to the estimate of 96.2%. Current Account will be released later on Thursday. The yen continues to lose ground, as USD/JPY was trading at 94.44.

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

1. Monetary Base: Sunday, 23:50. Japan’s  total currency in circulation  rose by 10.9% year-on-year in January, after posting 11.8% rise in the previous month. The increase was smaller than initially predicted. The central bank’s recent easing of monetary policies has facilitated the increase in January’s monetary base, analysts said. A further increase of 11.5% is forecasted.
2. Average Cash Earnings: Tuesday, 1:30.  Japanese employees’ total income dropped 1.4% in December from a year earlier, following 0.8% decline in November, indicating employers remained cautious during recession. It was the second consecutive year of declines; however the economy is expected to step out of recession early this year, amid global economic recovery and government stimulus.  A smaller decline of 0.3% is expected this time.
3. Rate decision: Thursday. Japan’s central bank  maintained its benchmark intert rate at a minimum low of 0.10%, also adding an unexpected 10 trillion yen ($128 billion) to an asset-purchase program. An asset fund increased to 30 trillion yen, with a credit lending program staying at 35 trillion yen. The recent political pressures were likely the cause for these bold measures. No change is rates is expected.
4. Leading Indicators: Thursday, 5:00. Japan’s index of leading economic indicators edged up to a seasonally adjusted 93.4 in December 2012, from 92.1 in the preceding month. The figure was a bit below analysts’ predictions of a 93.8 reading. A further increase to 96.2 is expected now.
5. Current Account: Thursday, 23:50. Japan’s current account balance climbed less-than-expected in December, from 0.23T in the preceding month. Analysts had expected Japan’s Current Account to gain 0.24T last month. The data indicates the economy continues to struggle. Another rise to 0.11T is anticipated.
6. Final GDP: Thursday, 23:50. Japan’s economy contracted for a second consecutive quarter in July-September, shrinking 0.9%, unchanged from preliminary data reported last month, due to weak global demand, keeping the Bank of Japan under pressure to further loosen monetary policy. Economists expected a lower drop of 0.8%.  GDP is expected to contract 0.1% this time.
7. BOJ Monthly Report: Friday, 5:00. Following the election of the new Prime Minister Shinzo Abe, the Bank of Japan had to adopt very strong aggressive policies to fight deflation and boost growth. The recent monthly report reflected this change by raising its assessment of the economy in February for the second month in a row, claiming Japan’s economy have stopped weakening and is about to rise from recession.

*All times are GMT.

USD/JPY  Technical Analysis

Dollar/ ¥ began the week with a gap towards the 95 line, but on the same crazy Monday, it also made a sharp fall below the 91.20 line. This is one-off event that lasted only for a few seconds. The 91.20 line held well afterwards. Later on, the pair traded between 91.20 and the 92.95 lines (mentioned last week), eventually breaking higher on the last day of the week, closing at 93.54.

Still above reach, 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. Before that, we have 96.90, which was a swing high in July 2009.

A very important line is 94.70 – which capped the pair for long months in early 2010. The gap high at the end of February touched this line for a short time. The previous February 2013 peak of 94.40 should be noted. A second move towards that line in February fell short.

93.84 was an initial peak for the pair as it climbed higher and has served as a cap afterwards. 92.95 was an earlier resistance line, and later served as support.

92.12 was a peak in the past, and provides some support, as seen in February 2013. The line is weaker now. 91.20, which capped the pair very temporarily on its way up in January 2013, is a support line and is now stronger.

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 minor 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 a strong support line.

Even lower, 87.60 provided support on a pullback when the pair traded higher in January, after previously working as resistance.

Another recent technical view:  –  USD/JPY Begins Tentative Climb Back to the Upside–  by James Chen

I turn from neutral to bullish on USD/JPY

While the political crisis in Italy could weigh on the pair, Japan continues pushing forward with monetary and fiscal stimulus. The nomination of Kuroda will likely be followed by his approval and he is likely to present ambitious plans to please the government. Assuming that the US figures will lean to the upside, like they did just now, another attempt to break 95 could be seen now, and perhaps it will be successful this time.