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USD/JPY continued to consolidate in a narrowing range. Will it break out of it now? Tankan Manufacturing Index is the key event this week. Here’s an  outlook  for the major market-moving events.

Last week trade  balance  figures provided another reassuring sign for the overall improvement in Japan’s economy by maintaining the gap between imports and exports at- 0.47T yen contrasting expectations of a bigger gap of -0.54T. Will this upward trend continue?

USD/JPY  daily chart with support and resistance lines on it. Click to enlarge:USD JPY Chart June 27 July 1 2011

Let’s Start:

  1. Retail Sales: Monday, 23:50. Japanese retail sales dropped 4.8% in April on a yearly base but less steep than the 8.3% drop in the March. Economists expected a drop of 6.1% indicating a rebound trend in the Japanese economy.   A smaller drop of -2.1% is expected.
  2. Prelim Industrial Production: Tuesday, 23:50. Japan’s industrial production rose a modestly by 1% in April following the 15.3% plunge in the previous month. The increase was below the 2.2% gain expected. Despite the low figures industrial production is expected to recover in the following months.  A climb of 5.6% is predicted.
  3. Manufacturing PMI: Wednesday, 23:15. Japanese manufacturing activity rebuilds itself after the March 11 earthquake and tsunami reaching 51.3 from 45.7 in April the highest rise in three months crossing the 50 point level towards expansion. Another increase is forecasted.
  4. Housing Starts: Thursday, 5:00. Housing starts increased unexpectedly by 0.3% in April contrary to the 3.0% drop predicted by analysts and following 2.4% drop in the previous month.  A rise of 3.1% is predicted.
  5. Household Spending: Thursday, 23:30. Japanese household spending fell 3.0% in April from a year following 8.5% plunge in the previous month indicating a slow rebounding from the March 11 catastrophe. A smaller drop of -1.6% is forecasted.
  6. Tokyo Core CPI: Thursday, 23:30. Tokyo’s core consumer price index increased by 0.1% in May lower than the 0.2% rise expected. Core CPI is expected to continue rising until 2012.  A rise of 0.2% is expected.
  7. Tankan Manufacturing Index: Thursday, 23:50. Japan’s large manufacturers’ index strengthened during the 1st quarter of 2011 reaching 6 in line with expectations following 5 in the previous quarter. Meanwhile, Japanese Tankan Non-manufacturing index edged up to 3 in the 1st quarter, from 1 in the last quarter of 2010 above the 2 expected. A drop to -7 is expected in the manufacturing index while a decrease to -3 is forecasted for the non-manufacturing index.

*All times are GMT

USD/JPY  Technical Analysis

Dollar/yen is trading in a very frustrating range. All in all, it rose on a weekly basis, but didn’t really trigger any of the important line mentioned 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 now works as resistance, though weaker than earlier.

81.06 joins the chart this week, after providing some support in May and working as resistance just now. 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 a minor support line, and provides a stepping stone towards a more important line. 79.75 is the historic low of 1995 and played a critical role when the pair collapsed in March. It worked nicely recently and will be critical for the pair now.

It’s followed by 79.16 which is minor resistance as well. The last line is 78.27 – both were significant before the big intervention.

Narrowing Channel

As seen in the chart, the pair’s trading range is enclosed by a narrowing channel. Uptrend support began at June, while downtrend resistance is with us since mid-May. These lines meet on July 5th. The breakout is likely to happen beforehand.

I am bullish on USD/JPY.

The end of QE2 in the US, and no QE3 in the foreseeable future means a stronger dollar. In addition, within the ugly contest between both economies, the Japanese one is still weaker, especially after the March 11 catastrophe.

FX Tech Strategy sees EUR/JPY and GBP/JPY heading lower.

Further reading: