The Japanese yen continues to sag, and on Thursday reached its lowest levels against the dollar since September 2010. Prime Minister Shinzo Abe was formally sworn in, and his new government is expected to press ahead with its economic platform, which would see the yen continue to fall. Abe is putting strong pressure to continue with aggressive monetary easing and adjust its inflation target to 2 per cent. The government and some members of the BOJ have called for a further weakening of the Japanese currency. The yen is on track to lose more than 10% of its value against the US dollar in 2012.
In the US, Congress reconvenes on Thursday and the tough negotiations over fiscal cliff will continue. After all the finger-pointing and tough rhetoric over the past few months, it’s crunch time in Washington. If the Democrats and Republicans don’t find some common ground, tax hikes and spending cuts worth some $650 billion will go into effect on January 1. This double-jab could send the economy reeling and push the US into a recession in 2013. Can the two sides hammer out an agreement? The markets are hoping that at the very least, some type of stop-gap measure can be reached before the deadline. This would provide some breathing room while negotiations for a comprehensive deal continue, and hopefully calm down the jittery markets. How will the fiscal cliff affect USD/JPY? An agreement would likely be dollar negative, as investors would feel more comfortable taking more risk. Conversely, if there are no signs of progress, market sentiment will sour and investors will flock to the safety of the US dollar.
Taking a look at economic releases, there were two readings out of the US on Wednesday. The S&P/CS Composite-20 HPI, an important housing inflation index, continued its recent upward swing, with an excellent 4.3% gain. However, the Richmond Manufacturing Index dropped to 5 points, well below the market forecast of 12 points. On Thursday, there are three key US releases – Unemployment Claims, CB Consumer Confidence, and New Home Sales. The markets will be hoping for a repeat of last week’s strong US data. However, developments in the fiscal cliff crisis could have a much greater impact on the currency markets than this week’s economic releases. In Japan, the BOJ released the minutes from its November policy meeting. Some members of the Bank’s Monetary Policy Committee stated that further action was needed so that the country’s monetary policy was reflected in exchange rates. This was widely understood as a call for a weaker yen, and USD/JPY responded by moving higher. Japanese Housing Starts posted a 10.3% gain, very close the 10.4% forecast. There are a host of Japanese releases on Thursday, including Preliminary Industrial Production and Retail Sales.
USD/JPY for Thursday, Dec 27, 2012
USD/JPY Dec 27 at 13:55 GMT
85.81 H: 85.81 L: 85.08
USD/JPY continues to weaken, easily breaking through resistance levels in the low 85 range. The pair is currently testing resistance at the round level of 86, which has important psychological significance. This line has held firm since August 2011. This is followed by resistance at 86.37. On the downside, 85.62 is the next line of support. This line has strengthened as USD/JPY trades at higher levels. It is followed by support at 85.15.
• Current range: 85.62 to 86
Further levels in both directions:
• Below: 85.62, 85.15, 84.75, 84.14, 83.44, 83.12 and 82.37
• Above: 86, 86.37, 86.97, 87.36, 87.95 and 88.55.
OANDA’s Open Position Ratios
Last week saw an increase in short positions, but this trend has leveled off. Trader sentiment continues to favor short positions by a slight margin. This indicates a slight bias towards a reversal and a correction by the yen. However, the trend of the pair continues to be upward, as the dollar pushes higher against the Japanese currency.
There is more room for the upward trend to continue, as the new Prime Minister, Shinzo Abe, aggressively pursues economic measures which will put more pressure on the yen. The fiscal cliff crisis will continue to impact on USD/JPY, with positive developments being dollar negative, while pessimistic news will sour market sentiment and push investors to seek the safety of the US dollar.
• 5:00 Japanese Housing Starts. Estimate 10.4%. Actual 10.3%.
• 13:30 US Unemployment Claims. Estimate 365K.
• 15:00 US CB Consumer Confidence. Estimate 70.3 points.
• 15:00 US New Home Sales. Estimate 382K.
• 23:15 Japanese Manufacturing PMI.
• 23:30 Japanese Household Spending. Estimate 0.8%.
• 23:30 Japanese Tokyo Core CPI. Estimate -0.5%.
• 23:30 Japanese National Core CPI. Estimate -0.1%.
• 23:30 Japanese Unemployment Rate. Estimate 4.2%.
• 23:30 Japanese Preliminary Industrial Production. Estimate -0.5%.
• 23:30 Japanese Retail Sales. Estimate 1.2%.