USD/JPY – Volatility Continues After BOJ Report, Strong US Numbers

USD/JPY continues to show volatility, as the yen flexed some muscle, dropping below the 84 line before giving up much of those gains. It has been a very busy week in Japan. First, the LDP won a convincing election win on Sunday. The party favors aggressive monetary easing in order to combat deflation, which continues to impede an economic recovery.

The BOJ lost little time in implementing further monetary easing, as it increased its asset-purchase program to JPY 101 trillion, up from JPY 91 trillion. Earlier on Friday, the BOJ issued its monthly report, in which it kept its assessment of the Japanese economy unchanged. The BOJ noted that the economy remains weak due to difficult global conditions, and the country’s manufacturing and export sectors continue to be hard hit. With the new government promising to use all tools at its disposal to kick-start the sluggish Japanese economy, further volatility by the Japanese yen could be the order of the day.

Back in the US, key economic data was generally sharp. Final GDP climbed 3.1%, which was higher than expected, and Existing Home Sales also beat the market forecast, posting its best performance since May 2011. This release is particularly encouraging, as it follows other strong housing numbers. The US housing sector, which has been a sore spot in the economy for quite some time, is showing signs of improvement.

The Philly Fed Manufacturing Index, which had a terrible reading last month, roared back and climbed all the way to 8.2 points, an eight-month high. The one disappointing release was Unemployment Claims, which came in at 361 thousand new claims, slightly higher than the estimate of 358K. All in all, however, the data points to an improving US economy as the recovery appears to be gaining traction.

Although the markets were pleased with the solid US releases, there is mounting concern as the fiscal cliff clock continues to tick down. Congress has taken a break for the Christmas holidays, and will not reconvene until December 27, which is very close to the deadline. 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. The political maneuvering between the two sides continues, as the Republicans tried to pass a bill known as “Plan B” which would have raised taxes only on those earning more than $1 million annually, but they did not have enough support for this initiative. As the markets become increasingly nervous, and we could see more volatility in the currency markets if the impasse continues. In Friday’s publications, there are seven releases out of the US, highlighted by Core Durable Goods Orders.

USD/JPY for Friday, Dec 21, 2012

USD/JPY Dec 21 at 12:45 GMT

84.09 H: 84.44 L: 83.86

USD/JPY Technical

USD/JPY continues to show volatility. The pair briefly broke through resistance at 84.14 early in the European session, but then retracted. This line has seen action throughout the week, and is providing stronger resistance than anticipated. The next line of resistance is at 84.75, well above the current activity. On the downside, 83.12 continues to provide strong support. With the pair showing strong movement in both directions, we could see further testing of support and resistance levels.
• 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
With the yen now over the 84 level, we have seen an increase in short positions, which now make up slightly more than half of the ratio. With USD/JPY marked by strong volatility, trader sentiment reflects the view that the pair could continue to show sharp movements in both directions before settling down.
The BOJ has been the focus of attention for USD/JPY traders and analysts, with the central bank announcing further easing and issuing a report on the health of the Japanese economy. As the markets digest these developments, we could see more volatility from the pair. As well, any news regarding progress in the fiscal cliff crisis can impact on USD/JPY, with positive developments being dollar negative.

USD/JPY Fundamentals
• 5:00 Bank of Japan Monthly Report.
• 13:30 US Core Durable Goods Orders. Estimate -0.2%.
• 13:30 US Core PCE Price Index. Estimate 0.1%.
• 13:30 US Durable Goods Orders. Estimate 0.2%.
• 13:30 US Personal Spending. Estimate 0.4%.
• 13:30 US Personal Income. Estimate 0.3%.
• 14:55 US Revised UoM Consumer Sentiment. Estimate 74.9 points.
• 14:55 US Revised UoM Inflation Expectations.
*Key releases are highlighted in bold
*All release times are GMT

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