USD/JPY – Yen Tumbles To Five-Year Lows After Fed Taper Move

The Japanese yen took a hit on Wednesday, losing about 160 points against the surging US dollar. This sharp drop followed the announcement that the US Federal Reserve would begin tapering its QE program by $10 billion, commencing in January. The yen has steadied on Thursday, as it trades just above the 104 line in Thursday’s European session. Taking a look at Thursday’s events, the lone Japanese release, All Industries Activity, posted a decline of 0.2%, which matched the forecast. It’s a busy day in the US, with three key releases – Unemployment Claims, Existing Home Sales and the Philly Fed Manufacturing Index.

Anyone looking for some drama from Bernard Bernanke and the Federal Reserve on Wednesday was not left disappointed. The Fed announced that it was tapering its QE program by $10 billion a month, commencing in January. This will reduce the Fed’s asset purchases to $75 billion every month, comprised of $40 billion in Treasuries and $35 billion in mortgage bonds. The announcement came as somewhat of a surprise, as most analysts had expected the Fed to hold off on any QE reductions until early next year. The currency markets reacted sharply to the news, and USD/JPY jumped to 104.53, its highest level since October 2008.

In its dramatic tapering announcement, the Federal Reserve was careful to separate tapering from rate hike expectations. Fed chairman Bernard Bernanke stated that interest rates are likely to remain low even after the unemployment rate drops below 6.5%. Previously, the Fed had stated that it would start to consider rate increases when unemployment fell below this level. Bottom line? With the unemployment rate at 7.0%, it could be a while before we see higher interest rates in the US.

Overshadowed by the Fed’s bombshell announcement, a two-year, bipartisan budget agreement is  sailing through Congress. The deal was overwhelmingly approved in the House of Representatives last week and the Senate followed suit on Wednesday, passing the measure by a vote of 64-36. The bill will now go the President Obama for his signature before becoming law. The agreement sets limits on government spending for two years and reduces the deficit by a modest $23 billion. Democrats and Republicans both had criticism of the proposal, but there is general agreement in Washington that the compromise reached is a positive step which removes the threat of a shutdown which paralyzed the government in October for 16 days.

Earlier in the week, Japan’s trade balance pointed to another trade deficit in November. The deficit rose to -1.35 trillion yen, up from -1.07 trillion a month earlier. The widening gap is largely due to the weakening yen, which makes imports more expensive. There was better news on Monday, as the important Tankan indexes impressed. The Tankan Manufacturing Index jumped to 16 points, up from 12 points the month before. This edged above the estimate of 15 points. The news was particularly welcome, as recent Japanese manufacturing releases have not impressed. The Tankan Non-Manufacturing Index did even better, improving from 14 to 20 points, well above the estimate of 16 points. Both indicators registered their best numbers since 2007, another indication that the Japanese economy is slowly heading in the right direction.

USD/JPY for Thursday, December 19, 2013

USD/JPY December 19 at 11:20 GMT

USD/JPY 104.06 H: 104.23 L: 103.79

USD/JPY Technical

• USD/JPY has steadied on Thursday, after sharp gains on the previous day. The pair showed some movement in the Asian session, dropping to a low of 103.79. It has since moved back above the 104 level.
• 103.30 has reverted to a support role as the dollar soars higher. This is followed by support at 102.53.
• On the upside, 104.17 is providing resistance. Will the surging dollar break through this weak line? This is followed by a resistance at 105.70, which has remained firm since October 2008.
• Current range: 103.30 to 104.17

Further levels in both directions:

• Below: 103.30, 102.53, 101.19, 100.00 and 98.92
• Above: 104.17, 105.70, 106.85 and 107.73

OANDA’s Open Positions Ratio

USD/JPY ratio is unchanged on Thursday, continuing the trend we have seen for most of the week. This is reflected in the pair, as the pair has settled down. The ratio continues to be made up of a majority of long positions, reflecting a trader bias towards the dollar continuing to gain ground against the yen.

The pair is trading just above the 104 line on Thursday. We could see more volatility from the pair during the North American session, as the US releases three key events, including Unemployment Claims.

USD/JPY Fundamentals

• 4:30 Japanese All Industries Activity. Estimate -0.2%. Actual -0.2%.
•  13:30 US Unemployment Claims. Estimate 336K.
• 15:00 US Existing Home Sales. Estimate 5.04M.
• 15:00 US Philly Fed Manufacturing Index. Estimate 10.3 points.
• 15:00 US CB Leading Index. Estimate 0.7%.
• 15:30 US Natural Gas Storage. Estimate -260B.

*Key releases are highlighted in bold

*All release times are GMT

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