USD/JPY enjoyed the optimism in Europe for a nice rise, but the rising prospects of QE3 sent it way down to a third negative week. Current Account and Final GDP are the major events this week. Here’s an outlook for the Japanese events and an updated technical analysis for USD/JPY.
Last week, Japanese companies’ continued to increase their spending in the second quarter from a year earlier rising 7.7% after a 3.3% I the preceding quarter. However the numbers are not as good as they look. In comparison with the first quarter capital spending decreased by 0.5% pointing on a possible slowdown which could affect Apil-June GDP growth rate. Will the BOJ expand its asset-purchase program at its next meeting?
Updates: BSI Manufacturing Index rose 2.5 points, its best performance since last September. M2 Money Stock gained 2.4%, just above the forecast of 2.3%. The yen continues to stengthen, as it tests the 0.78 line. USD/JPY was trading at 0.7803. Core Machinery Orders looked very sharp, climbing 4.6%. This figure easily beat the estimate of 1.7%. Tertiary Industry Activity dropped to a six-month low. The indicator dropped 0.8%, much lower than the estimate of -0.4%. CGPI declined by 1.8%, a notch better than the 1.9% market estimate. USD/JPY is steady, as the pair was trading at 77.78. Revised Industrial Production will be released on Friday. The markets are expecting a decline after a modest gain in August. USD/JPY dropped to a seven-month low, on expectations of QE3. The pair continues to drop, and was trading at 77.70. It finally happened: the Fed announced QE3 – open ended, $40 billion per month, in addition to more twist and a longer pledge for low rates through 2015. However, this was priced into the pair, and the result of higher US yields eventually pushed USD/JPY higher, as expected.
- Current Account: Sunday, 23:50. The adjusted current account showed a surplus of 773.6 billion yen, beating forecasts for a surplus of 714.7 billion yen after coming in at 282.2 billion yen a month earlier. However on a yearly bases current account decreased its surplus by 19.6% in June from a year earlier, better than the 62.6% fall in May. Surplus is predicted to narrow to 390 billion.
- Final GDP: Sunday, 23:50.Japan’s economy expanded at a revised 1.2% in the first quarter compared to the previous quarter. The rise was above predictions for a 1.1% expansion rate and better than the preliminary reading of 1.0%. The revised reading makes a 4.7% annualized growth vs. a preliminary reading of 4.1%, indicating stronger growth. A gain of 0.3% is expected in the second quarter.
- Economy Watchers Sentiment: Monday, 5:00. The Economy Watchers’ Survey index showed improvement inJapan’s current economic climate following three months of declines amid a boost in sales of beverages and air conditioners raising the index to 44.2 from 43.8 but still indicating contraction. The outlook remains gloomy amid a slowdown in auto sales. A small drop to 43.6 is expected.
- BSI Manufacturing Index: Monday, 23:50. The business survey index (BSI) measuring economic sentiment among large manufacturers improved to -5.7 in April-June, compared with-7.3 in January-March. Big corporations expect capital spending to increase 8.4% in the year until March 2013, following a forecast of a 0.3% decline in the previous survey suggesting a moderate recovery. A decline to -6.1 is forecasted.
- Prelim Machine Tool Orders: Tuesday, 6:00. Orders for Japanese machine tools declined 6.8% in July from a year earlier decreasing for a third consecutive month. Earlier readings show a bigger fall of 15.5%. Exports dropped 6% slipping for seven consecutive months amid lower demand from China and other parts of Asia.
- Core Machinery Orders: Tuesday, 23:50. Japan’s core machinery orders increased by 5.6% in June for the first time in three months, recovering from a record drop of 14.8% in May, however companies predict another slide in the third quarter due to global uncertainty especially from the EU offsetting a moderate expansion expected in capital spending. Another increase of 1.8% is anticipated.
- Tertiary Industry Activity: Tuesday, 23:50. Japan’s service sector expanded 0.1% in June, posting a second consecutive increase although slower than the 0.9% climb in May. Increases in financial services, automobile maintenance and retail sales of food and cars were nearly offset by sharp drops in civil engineering, trucking and power supply Low readings in the service sector may lower consumer confidence. A decline of 0.4% is forecasted this time.
- Revised Industrial Production: Friday, 4:30. Japanese industrial production increased by 0.4% in June from the previous month, well above the preliminary reading of a 0.1% decline posing the first increase in three months after a 3.4% plunge in May. The main contributors for this rise are solid output of chemical products, electronic parts and devices. Compared with the year earlier production dropped 1.5% in June revised up from the preliminary reading of -2.0%. A decline of 1.2% is expected now.
USD/JPY Technical Analysis
$/yen traded in a very narrow range throughout most of the week. It then made a sharp rise above 79 but turned around and bounced off the round 78 line (mentioned last week) before closing at 78.25.
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.
78.80 proved its strength as resistance in August 2012 again and again and is becoming stronger once again. The round number of 78 is now stronger support after being the bottom of the range.
77.50 was the bottom border of a range the pair had at the end of 2011. 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.
Steep Uptrend Support Broken
As shown on the chart, USD/JPY finished riding on uptrend support, and when this ended, the fall was clear to see.
I turn from bearish to neutral on USD/JPY.
The improving situation in Europe is weakening the yen, and QE3 hopes are weakening the US dollar. If QE3 is indeed announced, there’s some room for falls, but it isn’t 100% certain. A surprising compromise could help the pair, balancing the picture.
- For a broad view of all the week’s major events worldwide, read the USD outlook.
- For EUR/USD, check out the Euro to Dollar forecast.
- For GBP/USD (cable), look into the British Pound forecast.
- For the Australian dollar (Aussie), check out the AUD to USD forecast.
- For the New Zealand Dollar (kiwi), read the NZD forecast.
- For USD/CAD (loonie), check out the Canadian dollar forecast
- For the Swiss Franc, see the USD/CHF forecast.