USD/JPY – Yen Tests 97 As BOJ Stands Pat on Stimulus

USD/JPY remains under pressure in Friday trading. In the European session, the pair is testing the 97 line. In a policy statement, the Bank of Japan said it was maintaining its current monetary policy. In the US, Services PMI was released on Thursday and the key index disappointed, dropping to a three-month low. There are no US economic releases on Friday as Non-Farm Employment Change has been postponed to a yet undetermined date. FOMC members Dudley and Stein will speak later in the day. We’re heading into Day 4 of the government shutdown, and there has been no progress towards reaching an agreement on Capitol Hill.

As expected, the Bank of Japan opted not to add to its monetary stimulus program and is maintaining its benchmark interest rate at 1.0%. The BOJ remains cautiously optimistic, noting that the economy was improving at a moderate pace. The BOJ also decided to continue increasing the bank’s monetary base by 60-70 trillion yen/year and noted that inflation was on the rise. A cornerstone of Japanese economic policy has been the elimination of deflation, and the BOJ is slowly moving towards its target of 2.0% inflation. In other news, Prime Minister Shinzo Abe said that the economy is strong enough to absorb a sales-tax increase. The government is eyeing a higher sales tax as one method of tackling the country’s staggering national debt, which stands at 1,000 trillion yen – twice the size of its GDP.

Day 4 of the government shutdown is upon us, as the impasse over the budget continues. Democrats and Republicans are entrenched in their positions as each side blames the other for the deadlock. Republicans want a commitment from the Democrats to delay Obamacare before passing a budget, while the Democrats say that there can be no discussions on the heath care legislation before a budget is passed. With the government lacking funds to operate, it has been forced to close non-essential services across the country and send almost a million government workers home. Pressure on both sides to show some flexibility is growing, but so far no progress has been made as the stalemate drags on.

The government shutdown remains in the spotlight, but there is a far more serious crisis is lying just around the corner – the debt ceiling. The US has accumulated a debt of $16.7 trillion, and will run out of funds to service the debt by October 17, unless Congress authorizes raising the debt ceiling. Otherwise, the US could potentially default on its obligations, which could cause chaos in the domestic and international financial markets. There was some positive news on Thursday, as House Speaker John Boehner (Republican) apparently told his party that he would allow the Democrats to raise the debt limit. This would avoid another nasty fight in Congress, which is the last thing that the economy and the US dollar need right now.

Most experts predicted that the Federal Reserve would taper QE in September, and the markets were caught by surprise when the Fed balked and opted to maintain the levels of the bond-buying program at $85 billion/mth. However, with the budget deadlock in Washington, which has shut down the government, as well as growing fears about a debt ceiling crisis, expectations for a QE reduction have quickly dissipated. Even if both of these issues were to be resolved quickly, the distortions and delays in key economic data will make it difficult for the Fed to have an accurate, up-to-date picture of the US economy. This will likely rule out any decision to taper QE before the end of the year.

USD/JPY for Friday, October 4, 2013

USD/JPY October 4 at 11:00 GMT

USD/JPY 97.19 H: 97.19 L: 96.95

USD/JPY Technical

• USD/JPY is showing little movement on Friday. The pair briefly dipped below the 97 level in Asian trading.
• The pair is testing resistance at 97.87. Next, there is resistance at 98.64.
• On the downside, USD/JPY is testing support at 97.18. This line could fall if the yen continues to move upwards. This is followed by support at the round number of 96.00.
• Current range: 97.18 to 97.87

Further levels in both directions:

• Below: 97.18, 96.00, 95.06 and 94.20
• Above: 97.83, 98.43, 99.45, 100, 100.85 and 101.66

OANDA’s Open Positions Ratio

USD/JPY ratio has reversed directions, as it points to movement towards long positions in Friday trading. This is not reflective of what we are currently seeing from the pair, as the yen has posted slight gains against the dollar.

USD/JPY is trading quietly just above the 97 level. Unless there is a dramatic breakthrough in the US budget crisis, we can expect subdued movement from the pair during the day.

USD/JPY Fundamentals

• 2:49 Bank of Japan Monetary Policy Statement.
• 7:19 Bank of Japan Press Conference.
• 13:15 US FOMC Member William Dudley Speaks.
• 13:30 US FOMC Member Jeremy Stein Speaks.

*Key releases are highlighted in bold

*All release times are GMT

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