USD/JPY Outlook December 10-14

Dollar/yen underwent a second week of consolidation, ending the week almost unchanged. Will it stay stable in the final week before the elections? Core Machinery Orders  , Tertiary Industry Activity  and Tankan Index are the main events this week.  Here’s an  outlook  for the Japanese events and an updated technical analysis for  USD/JPY.

In the US, a strong Non-Farm Payrolls report is probably not enough to convince Ben Bernanke to stop easing. Last week a flow of weak data was released with capital spending rising 2.2%, lower than the 3.7% predicted, Average Cash Earnings also below expectations rising a minor 0.2% below the 0.4% rise predicted and Monetary Base rising by 5.0%, much lower than the 11.4% boost predicted. These weak data indicate Japan is still struggling.

Updates: BSI Manufacturing Index dropped sharply,  with a reading of  -10.3 points. The estimate stood at 4.3 points. Current Account rebounded nicely, posting a surplus of 0.41 trillion yen. This beat the estimate of 0.25T. Final GDP declined by 0.9%, a notch lower than the forecast of -0.8%. Consumer Confidence came in at 39.4 points, lower than the forecast of 40.3.Economy Watchers Sentiment posted a reading of 40.0, slightly higher than the forecast of 39.7. Preliminary Machine Tool Orders looked awful, plunging by 20.7%. Core Machinery Orders and Tertiary Industry Activity will be released later on Tuesday.  USD/JPY has edged lower, as the pair was trading at 82.43. Core Machinery Orders rose 2.6%, but this was lower than the estimate of 3.1%. Tertiary Industry Activity dropped a negligible 0.1%, which beat the forcast of -0.3%. CGPI posted a 0.9% decline, matching the forecast. The Tanken Manufacturing and Tanken Non-Manufacturing indices will be released later on Thursday. USD/JPY is edging higher, as the pair was trading at 0.8348.

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

1. BSI Manufacturing Index: Monday, 1:50. July-September quarter survey revealed an improvement in corporate sentiment reaching 2.5 after a minus 5.7 reading in the second quarter. However the ongoing recession in the EU and global uncertainty could lower sentiment in the fourth quarter. Another jump to 4.3 is expected this time.
2. Current Account: Monday, 1:50. Japan’s current account on a seasonal adjusted basis posted a deficit of 142 billion yen in September, down from 720 billion yen surplus in August, indicating a continuing decline in the economic condition of the world’s third largest economy. Exports were damaged by the continuing debt crisis in Europe and are expected to remain subdued for the next months. A flip to 250 billion surplus is expected.
3. Final GDP: Monday, 1:50.  Japan’s  economy  grew less than initially estimated in the second quarter rising 0.2% after a preliminary estimate of 0.3% expansion. The EU debt crisis as well as the slowdown in China made their mark on Japan’s exports. Furthermore, reconstruction demand following the earthquake and tsunami is waning, contributing to the downside trend in the Japan’s economy. A further contraction of 0.8% is expected.
4. Consumer Confidence: Monday, 7:00. Japanese consumer confidence  continued to deteriorate in October reaching 39.7, from 40.1 in September. Going further away from the 50 point line. The reading was in line with expectations. A small improvement to 40.3 is expected this time.
5. M2 Money Stock: Tuesday, 1:50. Japan’s money stock, increased by 2.3% in October from a year earlier, the sale as in the previous month. The narrow measure of money supply, M1, which consists of currency in circulation and deposit money, increased 5.0% y/y in October after rising 5.2% in the previous month. Another 2.3% increase is forecasted.
6. Core Machinery Orders: Wednesday, 1:50. Japan’s core machinery orders dropped  more than expected in September, declining 4.3% from the previous  month, due to weak domestic demand and exports. On the yearly basis, orders lost 7.8% in September. A rise of 3.1% is expected now.
7. Tertiary Industry Activity: Wednesday, 1:50. Japan’s service sector activity increased by 0.3% on month in September following the same rise a month ago. Economists expected a flat reading. The biggest increases were registered for compound services, and for the  finance and insurance sector. A drop of 0.3% is predicted now.
8. Tankan Manufacturing Index: Friday, 1:50. Japanese large manufacturers sentiment worsened in the third quarter as slowdowns in China and Europe damaged export demand and pushed Japan closer to recession. The quarterly Tankan index dropped to minus 3 from minus 1. However this reading was better than the minus 4 predicted by analysts but still indicating uncertainty in the market. Meanwhile Tankan Non-Manufacturing Index remained at 8 as in the previous month beating predictions for a reading of 7.

*All times are GMT.

 USD/JPY  Technical Analysis

$/ ¥ started the week with a gradual slide, dropping down to support at 81.80 (discussed last week), before climbing back up and finding resistance at 82.87.

Technical lines from top to bottom

86.27, which served as resistance, also in 2010, is the high point we start at. 85.50 is a high peak seen back in early 2011.

84.20 is a more recent swing high, seen in early 2012. It is followed by 83.34 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. The line also capped the pair during November and December 2012.

81.80 capped the pair in April, and is the level of the “shoulders” in the upwards thrust seen at the time. It worked perfectly well as support in December 2012. 81.43 is stronger after serving as resistance for a recovery attempt back in 2011, and capped a move higher in November 2011.

80.70 worked as resistance back in June and in a stronger manner in October. It turns into support now.  The round number of 80 is psychologically important, even though it was crossed several times in recent months.

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 strengthens again after capping the pair during November 2012.. 79.05 capped the pair in September 2012 and similar levels were seen in the past. Despite being temporarily overrun, the line still matters, especially after working as support in November 2012.

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.

Channel Remains Relevant

As the chart shows in the black lines, the pair is trading in an uptrend channel since early October. While it broke above the channel at one stage, the past shows it’s still relevant.

Another Recent Technical View:  USD/JPY Bullish Trend Consolidates in Pennant Pattern  by James Chen

I turn from neutral to bullish on  USD/JPY.

The two forces in play are the Fed meeting and the December 16th elections in Japan. While the Fed will likely the glass half empty of employment and growth figures, choosing to further ease, the strength of Shinzo Abe and his LDP party towards the elections could push the yen lower. Abe wants an aggressive monetary and fiscal policy.