USD/JPY Outlook October 8-12

USD/JPY finally reversed its course and moved up. The pair also broke above downtrend resistance. Are traders wary of an intervention by the BOJ? Current Account and the G& meeting are the highlight of this week. Here’s an  outlook  for the Japanese events and an updated technical analysis for  USD/JPY.

The positive Non-Farm Payrolls report in the US certainly helped the pair surge higher. The drop in the unemployment rate lowers the chance of more action from the Fed. In Japan, the Bank of Japan maintained its monetary policy unchanged in line with predictions in order to assess the impact of the monetary easing measures declared at its meeting last month. The new economic and fiscal policy minister Seiji Maehara called the BOJ to further pursue “powerful” monetary easing measures to stem the yen’s appreciation to which BOJ Governor Masaaki Shirakawa opposed saying such a move is equivalent to a foreign exchange intervention. Will Japan’s officials offer further drastic measures to restrain the yen?

Updates: Current Account looked sharp in September, climbing to 0.72 trillion yen. This easily beat the estimate of 0.52T. BOJ Governor Masaaki Shirakawa spoke  about BOJ Policies and Operations at an event in Tokyo. The BOJ Monthly Report was released on Tuesday.  The central bank revised down its assessment for the Japanese economy  for the second month in a row, due to the ongoing global slowdown. Economy Watchers Sentiment posted 41.2 points, falling short of the market forecast of 44.2 points. USD/JPY is choppy, as the pair was trading at 78.26. BOJ Governor Masaaki  Shirakawa spoke at an event in Tokyo. Preliminary Machine Tool Orders dropped 3.0%. It was the fifth straight decline for the struggling industrial indicator. USD/JPY is steady, as the pair was trading at 78.31. Core Machinery Orders plunged 3.3%, a three-month low. The estimate called for a smaller drop of 2.4%. The BOJ published its Monetary Policy Meeting Minutes on Thursday.  A government official  noted that sharp rise would pose a severe risk to Japan’s economy, and the government will take action regarding currency rates as required. Bank Lending continues to rise, climbing 1.0%. This marked the indicator’s highest increase since November 2009. USD/JPY was trading at 0.7836.

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

1. Current Account: Monday, 23:50.Japan’s current account surplus narrowed more than expected in July reaching 0.34 T from 0.77T in June. Analysts predicted a reading of 0.39T. This is further evidence to the slowdown in Japan’s Exports due to global factors. A bigger surplus of 0.52T is expected.
2. BOJ Monthly Report: Tuesday, 5:00. The September release of the BOJ last rate decision meeting showed that officials lowered their evaluation forJapan’s economic outlook, following a slowdown in September and in June. The Japanese economy was dependent lately on reconstructions activity and domestic demand that remained firm through September pushingJapan’s economy to a moderate recovery. However global slowdown is taking a toll onJapan’s struggling economy.
3. Prelim Machine Tool Orders: Wednesday, 6:00. Japanese preliminary Machine Tool Orders dropped 2.6% on a yearly base in August, following a 6.7% decline in the previous month. Between January and August 2012 total machine tool orders was 5.4% lower than the same period a year ago due to a contraction in global demand.
4. Core Machinery Orders: Wednesday, 23:50.Japan’s core machinery orders edged up 4.6% in July, way above the 1.7% rise predicted by analysts. This reading followed a 5.6% climb in June indicating a rise in capital spending despite global slowdown.        Compared with a year earlier, core orders, increased 1.7% in July. A drop of 2.4% is forecasted.
5. Monetary Policy Meeting Minutes: Wednesday, 23:50. The BOJ’s minutes of its August meeting show some members agreed that the central bank needs to come up with new ideas to boost inflation by fighting the strong yen through intervention in foreign exchange markets. Global slowdown with its negative effects was also discussed. They also voted to maintain rates at zero to 0.1%.
6. G7 Meetings: Thursday. –  Finance ministers  from the G7 –  the United States, Japan, Canada, Germany, France, Italy and Britain will meet on October11 in Tokyo.  Exchange rate  developments is one of the topics be discussed.  Japan’s   finance minister is expected to discuss the yen at the G7 meeting in hope to encourage foreign exchange intervention.
7. Household Confidence: Thursday, 5:00.Japan’s Consumer Confidence rose for the first time in three months in August reaching 40.5 after39.7 in July, amid improvement in the labor market. Moreover inflation expectations also increased. A further rise to 41.2 is forecasted.
8.  Tertiary Industry Activity: Thursday, 23:50.Japan’s service sector activity contracted 0.8% in July from a 0.2% gain in the previous month. The reading missed forecasts of a 0.4% decline. The main drops occurred in wholesale and retail trade, transportation, finance, personal services, accommodations and learning support. Another rise of 0.5% is expected this time.

USD/JPY  Technical Analysis

$/yen kicked off the trading week by battling the 78 line (mentioned  last week). It eventually rose above this line and finally challenged the 78.80 line. With the close at 78.66, the 78.80 line will be closely watched in the upcoming week.

Technical lines from top to bottom

82.87 is a veteran line – that’s where the BOJ intervened for the first time back in 2010. 81.80 capped the pair in April.

81.43 is stronger after serving as resistance for a recovery attempt. 80.60 provided support for the pair around the same time, and served as a bouncing spot for the next moves. It proved its strength as resistance in June 2012, more than once.

80.20 separated ranges in May 2012 and remains another barrier after 80 on the upside.  The round number of 80 is psychologically important, even though it was crossed several times in recent months. It is stronger now.

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. 79.05 capped the pair in September 2012 and similar levels were seen in the past. Despite being temporarily overrun, the line still matters.

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.

76.60 was a cushion for the pair at the beginning of the year and is rather strong. 76.26 is the next line on the downside after working as a support quite some time ago.

Downtrend Resistance – Broken

As you  can  see on the chart, USD/JPY broke above the downtrend resistance line formed from mid August. This is a bullish sign.

I am bullish on  USD/JPY.

Cautious optimism about global growth after the  positive Non-Farm Payrolls report, together with heightened rhetoric from the new Japanese finance minister support more gains. It’s important to note that moves in this pair remain limited.