USD/JPY Outlook Oct 29-Nov 2

USD/JPY continued moving upwards, riding on some improvement in the US and mostly on the high hopes for a very big QE program from the BOJ this week. So. the rate decision is the highlight of this week. Here’s an  outlook  for the Japanese events and an updated technical analysis for  USD/JPY.

In the US, GDP growth came out better than expected, and also contributed to the rising yen. In Japan, Tokyo Core CPI and the national Core CPI continued to decline a bit slower than predicted indicating deflation is still around. Meanwhile Adjusted Merchandise Trade Balance deficit increased to Y470 billion from Y370 billion in July. Will Japan’s economy be able to pull out of this slowdown?

Updates: Household Spending plunged to an eight-month low, declining by 0.9%. The estimate called for a 0.8% gain. As expected, the Unemployment Rate remained at 4.2% for a second straight month. Preliminary Industrial Production fell 4.1%, well   below the forecast of a 3.1% drop. The BOJ maintained the Overnight Call Rate at <0.10.%. The BOJ announced an expansion of 11 trillion yen in the QE program, falling short of some hopes.  USD/JPY was down sharply on the news,  as the pair was trading at 79.40. Average Cash Earnings came in at a flat 0.0%, beating the estimate of -0.3%. Housing Starts jumped 15.5%, the biggest gain in over a year. However, this was still short of the estimate, which stood at 16.6%. The BOJ ‘s Monetary Policy Meeting Minutes and the Monetary Base release will be published later on Thursday. The markets are expecting the Monetary Base to climb over 10%. USD/JPY has edged upwards, as the pair has crossed the important 80 line. The pair was trading at 80.09.

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

1. Retail Sales: Sunday, 23:50. Japan’s August retail sales posted the first yearly increase in two months climbing 1.8% due to subsidy-backed economy car sales. The reading followed a 0.7% drop in the previous month and was contrary to analysts’ predictions of a 0.3% decline. A 1.3% increase is expected this time.
2. Household Spending: Monday, 23:30. Household spending continued to rise in August climbing 1.8% on following a 1.7% gain in July. Analysts predicted a 1.1% increase. The main contributors were transportation and medical care. The average of monthly income also improved by a 1.8% on a year, contributing to the climb in household spending. A rise of 0.8% is forecasted now.
3. Prelim Industrial Production: Monday, 23:50. Industrial output in Japan dropped 1.3% in August, worse than the 0.5% fall predicted by analysts, following a 1.0% decline in the preceding month. The decline occurred amid a slowdown in electronic parts, communications equipment and chemicals industries. A further decline of 3.1% is expected this time.
4. Rate decision and BOJ Press Conference: Tuesday. The Bank of Japan (BOJ) maintained interest rates at 0.10% keeping the size of its Asset Purchase Program. The BOJ predicts the country’s economy will return to moderate growth, if strong domestic demand continues and overseas economies improve. However the risks still remain valid amid global markets’ uncertainty and deflation. The  BOJ’s board will probably cut its growth forecasts and possibly increase its asset purchase program in this meeting.
5. BOJ Outlook Report: Tuesday, 6:00. The central bank will release its semi-annual outlook report on prices and growth providing valuable information for investors. The BOJ is predicted to lower its growth forecast as well as announce that inflation will fail to reach its 1.0% target within the next two years.
6. Manufacturing PMI: Tuesday, 23:15. Japanese manufacturing activity improved in September reaching 48.0 following 47.7 in August, but still indicating contraction due to weak global demand and the strong yen.
7. Average Cash Earnings  : Wednesday, 1:30. Employees’ wage increased for the first time in four months in August, climbing 2.7% to an average total of 274,359 yen, following a 1.6% drop in the previous month. Economists predicted a 0.9% fall. A 0.3% decline is expected this time.
8. Housing Starts: Wednesday, 5:00. Housing declined 5.5% in August on a yearly base declining for the third consecutive month. Economists expected a 7.4% decline. This reading suggests a possible weakening in the housing sector. This time a surge of 16.6% is forecasted.

*All times are GMT.

 USD/JPY  Technical Analysis

$/yen started the week with a gradual climb towards the mighty 80 line (mentioned last week). Support was at 79.70, as expected. A first attempt to cross the line met resistance. A second one was already more successful and the pair reached 80.37 before descending and eventually closing at 79.64, still higher than last week.

Technical lines from top to bottom

We start from higher ground this week. 84 is a round number and also served as a peak in March. It is followed by 83.20 which capped the pair in April and also beforehand.

82.87 is a veteran line – that’s where the BOJ intervened for the first time back in 2010. 81.80 capped the pair in April.

81.43 is stronger after serving as resistance for a recovery attempt. 80.60 provided support for the pair around the same time, and served as a bouncing spot for the next moves. It proved its strength as resistance in June 2012, more than once.

80.20 separated ranges in May 2012 and and proved to be a line of struggle also in October 2012.  The round number of 80 is psychologically important, even though it was crossed several times in recent months. It is a serious battleground now.

79.70 was a cap was seen in June 2012. It proved its strength as resistance once again in July 2012 and proved critical before the downfall in August 2012. It is weaker now. 79.05 capped the pair in September 2012 and similar levels were seen in the past. Despite being temporarily overrun, the line still matters.

78.80 proved its strength as resistance in August 2012 again and again. The last attempt at the beginning of October should monitored. The round number of 78 is now stronger support after being the bottom of the range  and is becoming stronger after working as a cushion also in September 2012.

77.40 was the extended low line in September 2012, until the pair rebounded. It is followed by 77, which is only minor support.

76.60 was a cushion for the pair at the beginning of the year and is rather strong. 76.26 is the next line on the downside after working as a support quite some time ago.

Uptrend Resistance Broken  

The pair traded in a nice channel, and it has now broken to the upside. This is a bullish sign. Uptrend support accompanies the pair since the end of September, and uptrend resistance began one week later.

I remain bullish on  USD/JPY.

With the US continuing to show some signs of growth and with another worrying trade balance report in Japan, there is room for more gains after the channel was broken. A lot depends on the BOJ. A package of 20 trillion yen would be convincing. 10 trillion would not be enough for another burst higher.