USD/JPY Outlook – July 18-22

The frustrating pair finally broke out of range and went south. Trade balance is the highlight of this week. Here’s an  outlook  for the Japanese events and an updated technical analysis for  USD/JPY.

Last week the  Bank of Japan  decided to maintain the overnight call rate at a range of 0 to 0.1% by a unanimous vote and did not change its any of its policy rulings . The BOJ announcedJapan’s economy is advancing with positive inflation figures.  The Bank is expectomg real GDP growth of 0.2-0.6% in fiscal 2011, and 2.5-3.0% in fiscal 2012. The yen enjoyed  the new talks about QE3, but as they faded away, the dollar managed to recover.

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

Let’s Start:

1.  Trade Balance: Wednesday, 23:50. Japan’ trade balance deficit dropped below expectations in May reaching 0.47T deficit from 0.50T in the prior month indicating things are starting to improve following the March 11 earthquake and Tsunami hit northern Japan. Deficit is expected to narrow to 0.25T this time.
2. All Industries Activity: Thursday, 4:30. Japan’s all industry activity index rose less-than predicted by 1.5% to92.2 in April dropping  6.4% to  90.8  in March, indicating a major gains in the manufacturing sector. Economists expected the activity to rise by 1.9%. Analysts forecast the same rise of 1.9% predicted earlier.

*All times are GMT

USD/JPY  Technical Analysis

Dollar/yen began the week piercing downwards and found it hard to make a comeback. The 0.7975, worked as resistance. Some lower lines have changed from last week.

Technical lines, from top to bottom:

83.30 is a weak line that capped the pair just before the disaster at the beginning of March and also working as support a few months earlier.  82.87 was the trough before the BOJ intervention in September 2010 and also played an important role in recent weeks as the peak of a recovery attempt.

82.20 capped the pair in a very stubborn way a few weeks ago and remains a strong line now.  81,33 proved to be a distinctive line separating ranges – it was a double top about a month ago and and regained its strength two weeks ago.

81.06 was a weak line of support in May and slowed down a second move upwards. 80.70 capped the pair several times in recent weeks and remains a strong and immediate line of resistance.

The round number of 80 is only a minor line now. 79.75 is the historic low of 1995 and played a critical role when the pair collapsed in March. After the pair fell below this line, it quickly switched to strong resistance.

Below, 79.30 proved to be a persistent cap for dollar/yen, holding down recovery attempts. 78.90 is a minor line below.

Further down, 78.45 was the bottom in this recent fall, doing it twice and making it strong support.

I am bullish on USD/JPY.

The Japanese economy continues to struggle, and a significant portion of exporters now consider moving their business elsewhere. In addition, at these levels the BOJ might intervene. With QE3 moved to the table and back, and now further back, the dollar has a chance of eventually winning.

Further reading:

•  For a broad view of all the week’s major events worldwide, read the  USD outlook.
• For EUR/USD, check out  the  Euro to Dollar forecast.
• For GBP/USD  (cable), look into the  British Pound forecast.
• For the Australian dollar (Aussie), check out the  AUD to USD forecast.
• For the New Zealanddollar (kiwi), read the  NZD forecast.
• For USD/CAD (loonie), check out the  Canadian dollar
• For the Swiss Franc, see the  USD/CHF forecast.