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Dollar/yen  moved slightly higher, but remained in range. Will the pair move now, at the beginning of Q4?  Tankan Manufacturing Index and the rate decision are the main events this week. Here’s an  outlook  for the Japanese events and an updated technical analysis for  USD/JPY.

Last week retail sales dropped unexpectedly by 2.6% following 0.6% in the previous month on a yearly base; household spending plunged  4.1% from 2.1% decrease in the preceding month and industrial production gained 0.8% while 1.5% increase was predicted. Are these weak readings an ominous sign for the future or just a temporary slowdown in the path to recovery?

USD/JPY  daily chart with support and resistance lines on it. Click to enlarge:USD JPY Chart October 3 7 2011

Let’s Start:

  1. Tankan Manufacturing Index; Sunday, 23:50. Japanese large manufacturers became pessimistic about business condition in the second quarter. The Tankan index fell to -9 points following 6 points gain in the previous quarter. However the survey showed a steady recovery process after the earthquake and tsunami in March. Meanwhile Tankan large non-manufacturers slipped to minus 5 in June from 3 in March but expect improvement in September. Tankan large manufacturers index is expected to increase by 11 points reaching 2 while Tankan large non-manufacturers index is expected to grow by 8 points reaching 3.
  2. Monetary Base: Monday, 23:50.Japan’s total value of currency in circulation jumped 15.9% in August after 15.0% annual increase in July. Economists predicted 14.2% rise. This rise indicated improved market conditions. Currency in circulation  is expected to grow to 16.3%.
  3. Average Cash Earnings: Tuesday, 1:30. Labor cash earnings in Japan declined, unexpectedly, in June by 0.8% following 1.0% increase in the preceding month. Analysts expected a 0.5% gain. An increase of 0.7% is predicted now.
  4. Rate decision; Friday. The Bank of Japan left the monetary policy unchanged after increasing stimulus by 10 trillion yen ($130 billion). Interest rate was maintained between zero and 0.1% in line with expectations. Further monetary support was discussed in case the yen will continue to strengthen. No change is expected now.
  5. Leading Indicators: Friday, 5:00. The index of leading indicators, which predicts economic developments in the coming months, increased by 2.7 points to 106.0 mainly due to positive housing data occurred before the expiration of the government’s incentive program for the purchase of environmentally friendly homes. A drop to 103.8 is forecasted.

*All times are GMT

USD/JPY  Technical Analysis

More range trading has been seen for this pair. It gradually moved higher towards the end of the week, but the attempt to close above 77 (mentioned last week) failed again.

Technical lines from top to bottom

79.30 proved to be a stubborn cap for dollar/yen, holding down recovery attempts. At these tight ranges, it remains far at the moment. Another downwards leg was seen after an attempt to break higher.  78.50 provided some support before another drop, and is now a weak line of resistance.

77.85 was tough resistance when the pair made an attempt to make an upwards move higher in September. The round number of    77, remains a significant cap for the range trading that characterizes the pair even though it was temporarily breached.

Further below we have the swing record low of 76.25 which is still of some importance.  The low record of 75.95 is the final frontier in charted territory.

Below, the round number of 75 is the next potential cushion and an area where the Japanese authorities will be keen to intervene.

I am neutral on USD/JPY.

In the long run, the pair has room to rise given the weakness of the Japanese economy and the flows towards the US dollar, especially as the situation in the US isn’t so bad.. But the safe haven status of the yen has just strengthened after the Swiss franc dropped out of this race.

Further reading:

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