USD/JPY continues to show volatility after Thursday’s Bank of Japan policy meeting. As widely expected, the BOJ implemented further monetary easing, and increased its asset-purchase program by purchasing JPY 101 trillion, up from JPY 91 trillion.
Somewhat surprisingly, the central bank did not alter its target rate of inflation to 2%, electing to maintain the current target of 1%. There were expectations that the BOJ would change its posture on inflation following calls on the Bank from incoming Prime Minister Shinzo Abe to take immediate steps to combat deflation. Following the BOJ announcement, the yen strengthened, but has retracted and crossed back above the 84 level.
In the US, the markets have toned down their optimism over the fiscal cliff negotiations, as the gridlock on Capitol Hill Continues. The Republicans and Democrats continue to dig in and blame each other for the crisis, but recent polls indicate that a majority of Americans think that the Republicans need to be more flexible in their positions, especially regarding tax hikes on the wealthy.
The Republicans are well aware of public sentiment, and have softened their positions and their rhetoric. However, there is still a significant gap between the sides as far as tax hikes and the extent of spending cuts to Federal programs. The Republicans have offered tax hikes on individuals earning more than $1 million, but the Democrats want to extend these hikes to earners above $250,000. Clearly frustrated, Republican House Leader John Boehner has warned that if the President Obama doesn’t show more flexibility, he will be “responsible for the largest tax increase in American history.” With the fiscal cliff deadline fast approaching as we near the end of 2012, we could see further volatility from USD/JPY, as the markets react to the latest developments concerning progress on this issue.
Taking a look at fundamentals, there was good news for the US housing sector, as Building Permits beat the forecast, climbing to 0.90 million in November. This was the indicator’s highest level since August 2008. Housing Starts was down slightly, but within the markets estimate. Existing Home Sales will be released later on Thursday, and the markets are expecting a strong increase from the previous reading.
If the indicator can meet or beat the forecast, this would point to further improvement in the US housing sector, which has gone through difficult times and is critical to a sustained economic recovery. Today’s other key releases out of the US are Unemployment Claims and the Philly Fed Manufacturing Index. Unemployment Claims are expected to rise, which would be bullish for the dollar. The Philly Fed Manufacturing Index had an awful reading for October, coming in at -10.7 points. Another decline is expected, although much smaller, with the estimate standing at -2.2 points. Any unexpected readings from today’s key releases (either below or above the market estimate) could affect the movement of USD/JPY.
USD/JPY for Thursday, Dec 20, 2012
USD/JPY Dec 20 at 11:50 GMT
84.13 H: 84.38 L: 83.86
Following the BOJ announcement to implement further easing, USD/JPY continues to show volatility. 0.84141 has been under pressure all week and this is continuing. The pair broke through this line earlier today and we can expect more activity around this level. The next line of resistance is at 84.75, which is safe for now. On the downside, 83.12 is providing strong support.
• Current range: 83.44 to 84.75
Further levels in both directions:
• Below: 83.44, 83.12, 82.37, 81.83 and 80.
• Above: 84.14, 84.75, 85.15, 85.62 and 86.32.
OANDA’s Open Position Ratios
The news out of Japan is anything but dull, with the elections and easing by the BOJ on Thursday. USD/JPY continues to show volatility. With the yen now over the 84 level, the open position ratio has shifted, with an increase in short positions. Trade sentiment remains split, with a slightly higher expectation that we will see a correction and the yen will make up some ground against the greenback.
As the markets digest the most recent action by the BOJ, we are likely to see more volatility from USD/JPY. Traders should also keep a close eye on the fiscal cliff in the US, as developments in Congress could affect the movement of USD/JPY. Reports of progress towards an agreement could weaken the dollar, as the market’s appetite for risk grows. Conversely, if the crisis deepens, investors will likely seek the safety provided by the US dollar.
• 4:01 Japanese Monetary Policy Statement.
• 4:01 Japanese Overnight Call Rate. Estimate <0.10%. Actual <0.10%. • 4:01 Bank of Japan Press Conference. • 13:30 US Unemployment Claims. Estimate 358K. • 13:30 US Final GDP. Estimate +2.8%. • 13:30 US Final GDP Price Index. Estimate +2.7%. • 15:00 US Existing Home Sales. Estimate 4.88M. • 15:00 US Philly Fed Manufacturing Index. Estimate -2.2 points. • 15:00 US CB Leading Index. Estimate -0.2%. • 15:00 US HPI. Estimate +0.2%. • 15:30 US Natural Gas Storage. Estimate -73B. *Key releases are highlighted in bold *All release times are GMT