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Preliminary Industrial Production and Average Cash Earnings are the main events on out menu this week. Here’s an outlook for the Japanese events and an updated technical analysis for USD/JPY.

Rating agency Standard & Poor’s decreased Japan’s long-term sovereign debt rating to AA minus on Jan 27 for the first time since 2002, claiming the country’s government does not have an operative plan to deal with its mounting debt. Will this sanction spring the Japanese government into action or bring another hammer  blow  to an  already weak economy?

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

USD JPY Chart Jan 31 - Feb 4
USD JPY Chart Jan 31 - Feb 4 - Click to enlarge
  1. Manufacturing PMI: Sunday, 23:15. Japanese manufacturing activity decreased moderately from the 50 point line for a fourth straight month in December reaching a seasonally adjusted 48.3 from November’s 47.3.
  2. Prelim Industrial Production: Sunday, 23:50. Prelim Industrial Production figure climbed 1% for the first time in six months. This may signal the first signs of Japan’s economic recovery. A big climb of 2.9% is predicted now.
  3. Housing Starts: Monday, 5:00. Housing starts rose 6.8% in November from a year earlier thanks to the government stimulus steps and tax breaks for energy-efficient homes. This followed a 6.4 percent increase the previous month which is the sixth straight month of annual rises. A small drop to 5.1% is expected now.
  4. Average Cash Earnings: Tuesday, 1:30. The Labor Cash Earnings fell by 0.2% over the year to November 2010, below expectations of a 0.6% rise and following a revised 0.5% increase the previous month. This is the first fall in 9 months. The decline is mainly due to a worsening of both overtime pay and special pay including bonuses. A, increase of 0.9% is expected now.
  5. Monetary Base: Tuesday, 23:50. Japan’s monetary base rose 7.0%  in December from a year earlier following 7.6% rise in November. Current account deposits at the central bank grew an annual  36.6% in December after rising 47.3% in the year to  November. Another rise of 7.6% is expected now.

*All times are GMT

USD/JPY Technical Analysis

Dollar/yen fell at the beginning of the week, and then jumped high on the credit rating downgrade of Japan. The Egyptian crisis sent the pair back down, to find support for the second time in the week at the strong 82 line (mentioned last week), to close at 82.06.

Looking up, 82.87, which was the line where the BOJ intervened to weaken the yen, is the first line of resistance line, although it’s rather weak now.

Above, stronger resistance is found at 83.40 which capped the pair as such in recent weeks.    Higher, 84.50 is the highest level since October and is a very tough resistance line.

Moving higher, 85.93 was the highest level the pair reached after the big intervention in September. Above, 86.34 and 87.02 were support lines on the way down, and now work as minor resistance.

Even higher, strong resistance is found at 88.12, which worked in both direction last summer, and then by 89.15 which capped USD/JPY at that same period

Looking down, the 82 line, which prevented further falls this week, is the immediate and strong line of support. In October, it served as resistance.

Lower, 80.87 is a tough line – it served as support through October and also sent the pair back up a few times in 2011. It’s followed by 80.40, the lowest close ever and by 79.75, the lowest intra-day level, reached back in 1995.

I am bullish on USD/JPY.

Japan’s credit rating downgrade is another evidence of the weakness in the Japanese economy, while the positive US GDP release shows that the US is on the recovery path. When the situation in Egypt calms down, this pair has room to rise.