USD/JPY – Yen Strengthens as Yellen Dismisses Hike Talk

USD/JPY has posted small gains on Wednesday, as the pair trades at 112.44 at the start of the North American session. Earlier in the day, USD/JPY broke just below the 112 level. In economic news, ADP Nonfarm Employment Change slipped to 200K, but this beat expectations. In Japan, Preliminary Industrial Production declined 6.2 percent, which was weaker than the estimate. On Thursday, Japan releases the Tankan indices, key gauges of the health of the services and manufacturing sectors.

The Japanese yen posted solid gains on Tuesday, after Janet Yellen surprised the markets with a surprisingly dovish speech in New York. Yellen served notice that the Fed would continue its cautious approach towards monetary tightening, given the turbulent global economy and risks due to the Chinese slowdown. Yellen downplayed higher inflation levels, which in January reached 1.7 percent, the highest in almost two years. This reading is not far from the Fed’s target of 2.0 percent and some Fed members have gone on record saying that the Fed should raise rates before inflation pushes above the 2.0 percent threshold. At the same time, Yellen acknowledged that there were encouraging signs in the US economy, including a strong labor market. Her comments dampened recent speculation about an April rate hike, which was precipitated by a flurry of hawkish comments from Fed officials. It will be interesting to see if Yellen’s cautious assessment will be reinforced or challenged by Fed members in the coming days.

US economic growth in the fourth quarter was respectable, but there are signs that we could see softer numbers for the first quarter of 2016. Earlier this week, the Atlanta Fed downgraded its forecast for Q1 from 1.4 percent to 0.6 percent. The original forecast, released just last week, was lowered in response to a downgraded forecast of personal income and outlays by the US Bureau of Economic Analysis. US Final GDP for the fourth quarter rose 1.4 percent, above the estimate of 1.0 percent, but lower than the 2.0 percent gain in the third quarter. If US economic activity did in fact weaken in Q1, we could see the US dollar lose ground against its major rivals.

The Japanese economy has been sluggish, and any improvement in the situation will require Japanese consumers to open their wallet strings and spend more. On Monday, Japanese consumer spending indicators were mixed. Retail Sales broke a nasty streak of three consecutive declines, posting a gain of 0.5 percent in February. There was better news from Household Spending, which posted a strong gain of 1.2 percent, after five consecutive declines. The BoJ remains under pressure to make a move at the April policy meeting, although it’s questionable whether the BoJ has any remaining monetary tools that would be effective. The central bank adopted negative rates in January, but this has done little to breathe life into the economy or raise anemic inflation levels.

USD/JPY Fundamentals

Wednesday (March 30)

• 8:15 ADP Nonfarm Employment Change. Estimate 195K. Actual 200K
• 10:30 US Crude Oil Inventories. Estimate 3.1M

Upcoming Key Events

Thursday (March 31)

• 8:30 US Unemployment Claims. Estimate 266K
• 19:50 Tankan Manufacturing Index. Estimate 8 points
• 19:50 Tankan Non-Manuufacturing Index. Estimate 24 points

*Key releases are highlighted in bold

*All release times are DST

USD/JPY for Wednesday, March 30, 2016

USD/JPY March 30 at 8:50 DST

Open: 112.67 Low: 111.99 High: 112.70 Close: 112.53

USD/JPY Technical

• USD/JPY posted losses in the Asian session but has recovered in European trade
• 112.48 was tested earlier in support and is under strong pressure. This line could break in the North American session.
• 113.86 has some breathing room as resistance following strong losses by USD/JPY on Tuesday
• Current range: 112.48 to 113.86

Further levels in both directions:

• Below: 112.48, 111.50, 109.87 and 108.37
• Above: 113.86, 114.65 and 115.59

OANDA’s Open Positions Ratio

USD/JPY ratio remains almost unchanged this week. Long positions command a strong majority (59%), indicative of strong trader bias towards the pair reversing directions and moving to higher levels.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.