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The quarterly  Tankan Manufacturing Index release is one of the most important Japanese indicators, and it always rocks USD/JPY. Here is what is expected, and 5 possible outcomes for dollar/yen, that can break out of the tight range.

Published on Thursday, June 30th, at 23:50 GMT.

Indicator Background

The Bank of Japan publishes this report early in the quarter, and composes the figure out of a large survey of manufacturers, making the release an excellent and up to date gauge of the Japanese economy, one of the strongest market moves coming from Japan.

The figure for Q1 was positive, +6, showing improving economic conditions. It is important to note that the survey was made before the devastating March 11 catastrophe, thus not taking into account the severe economic damage that the earthquake, tsunami and nuclear disaster imposed on supply chains.

So, the figure for Q2 will already be totally different – negative. The last time that worsening conditions were expected was back in Q1 2010. According to GDP figures, Japan is in a recession already. So, the official expectations of a score of -7 could be overly optimistic.

Sentiment and technical levels

The dollar and the yen are both “second tier safe haven” currencies, both looking up to the Swiss franc. Their current strength or weakness is equal. In addition, the pair is recently trading in a narrow and stable range, making the sentiment very neutral.

Technical levels, from top to bottom: 82.87, 82.20, 81.33, 81.06, 80.70, 80, 79.75 and 79.16.

5 Scenarios

  1. Within expectations: -5 to -9: In such a case, the pair will shake, but is unlikely to break out of range, even if the range is narrow.
  2. Above expectations: -1 to -4: A case of optimism is possible, given the determination of the Japanese. In this case, the pair will drop, and will likely break above one resistance level.
  3. Well above expectations: 0 or higher: A case of improving conditions is highly unlikely. In such a case, the pair will drop, and can even challenge a second level of support.
  4. Below expectations: -10 to -14: Such a scenario cannot be ruled out, given the immense damage of the disaster. USD/JPY is likely to rise, breaking one resistance level.
  5. Well below expectations: -15 or less: A big downfall cannot be ruled out. Dollar/yen can challenge a second resistance level, and send the pair away from the recent narrow ranges.

For more, see the USD/JPY Forecast.

Expert score

5

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