USD/JPY Outlook January 7-11

USD/JPY continued moving higher in what became a vertical move. The pair reached 30 month highs. Will it make a pullback or at least take a break? Current account is the highlight event of this week. Here’s an  outlook  for the Japanese events and an updated technical analysis for  USD/JPY.

Te move higher was due to the ongoing rhetoric from the new Japanese government, that wants a weaker yen and higher inflation. In addition, the not-so-dovish meeting minutes from the Fed, in which some members saw an easing in easing at the end of the year, and an OK Non-Farm Payrolls report, also helped the dollar against the yen.

Updates: Japanese Monetary Base was outstanding, jumping 11.8%. This easily beat the estimate of 5.3%. The Japanese government announced it was purchasing bonds from the ESM, the Eurozone bailout fund. The move is widely seen as an additional way for the government to weaken the yen. USD/JPY remains steady, as the pair was trading at 85.54. Japanese Leading Indicators Index came in at 91.9%, below the forecast of 93.1%. Current Account, a key indicator will be released later on Thursday. The markets are expecting the surplus to narrow. USD/JPY  continues to trade above the 88 level, as USD/JPY was trading at 88.25.

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

1. Monetary Base: Sunday, 23:50. Japan’s currency in circulation edged up 5.0% in November compared to the same month last year, following a 10.8% climb in the previous month indicating that the monetary easing policies spurred activity in the market increasing the amount of currency in circulation, which in turn stimulates growth. The increase in the supply of money is expected to increase inflation.5.3%
2. Leading Indicators: Thursday, 5:00. A leading index in Japan aimed to predict the future direction of the economy edged up to 92.5 in October in October from 91.6 in September. Together with the rise in monetary base, Japan’s economic condition seems to be improving moderately. A further  rise to 93.1 is anticipated.
3. Current Account: Thursday, 23:50. Japan’s current account balance rose more-than-expected in October reaching a seasonally adjusted 0.41T, from -0.14T in the preceding month, well above predictions of a 0.25T reading. However on a yearly base current account surplus contracted in October from a year earlier due to weak exports. A smaller surplus of 0.31T is expected now.
4. Economy Watchers Sentiment: Friday, 5:00. Japan’s service sector edged up to 40.0 in November 39 in the previous month indicating the economy  has stopped deteriorating but still remains weak. A further improvement to 41 is expected now.

*All times are GMT.

USD/JPY  Technical Analysis

$/ ¥ began the trading week with a slide, dropping towards the 85.50 line (mentioned last week). It then changed direction quickly and renewed the uptrend, peaking at 88.40 – a new line on the chart.

Technical lines from top to bottom

We begin from higher ground this time.  A very important line is 94.70 – which capped the pair for long months in early 2010.  92.12 worked in both direction in 2009 and 2010. These are still in the distance at the moment.

The ultimate resistance line for now is 90 – a target marked by many analysts and a round number. Below, 89.10 was a peak in the summer of 2010, before the pair began descending.

88.40 is the peak of January 2013 and is immediate resistance at the moment. The line replaces the 88 line.  Below, 87.60 provided support on a pullback when the pair traded higher in January, after previously working as resistance.

86.27, which served as resistance, also in 2010 is weakening now. 85.50 is a high peak seen back in early 2011 and remains important support now.

84.20 is a more recent swing high, seen in early 2012. This is now critical resistance for any move forward.An initial move above this line in December 2012 turned into a false break. It is followed by 83.34 which capped the pair in April and also beforehand. It switched to support after the surge in December.

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.

Channel Left Behind After Breakout

As the chart shows in the black lines, the pair traded in an uptrend channel since early October. After the breakout seen in the previous week, USD/JPY’s moves just became stronger.

Another Recent Technical View:  USD/JPY Ascends to Multi-Year High  – by James Chen.

For your convenience, here is also a weekly chart:

I am neutral on  USD/JPY.

After a period of very strong rhetoric, the new Japanese government is beginning to show some signs of satisfaction to recent downfall of the yen. While they do not have control of the markets, Abe and his colleagues certainly have influence. In the US, the Fed’s lack of dovishness in the minutes was somewhat overestimated, and the prolonging of the fiscal cliff saga also weighs on the dollar against the yen. It’s important to remember that the yen still has some safe haven charm. All in all, a big pullback isn’t likely, but a breather is certainly necessary after the vertical surge.