The Japanese yen has steadied against the US dollar, following last week’s steep decline. USD/JPY is back below the 88 level as we begin the new trading week. After a long break, Japanese releases have resumed, with a strong reading to start the new year. Japanese Monetary Base looked very sharp, jumping 11.8%. This was its best performance since February. There are no US releases on Monday.
The markets were pleased as the fiscal cliff agreement was approved by Congress last week, but more trouble lies ahead. Although both the Senate and House of Representatives passed the deal by large margins, there was plenty of grumbling on both sides of the political divide – perhaps proof that the deal reached was a true compromise. Most notably, the hard-fought agreement failed to deal with two critical issues – the debt ceiling and spending cuts. The debt ceiling will be reached in February, and Republicans have vowed that the government must agree to deep spending cuts before they will agree to raise the debt ceiling. For their part, the Democrats are strongly opposed to cuts to major federal programs such as Medicaid. The IMF has also weighed in, saying that the fiscal agreement is not enough, and that the US must take further action to deal with its long-term debt problem. The IMF call for Congress to quickly approve a comprehensive plan which to “ensure both higher revenues and containment of entitlement spending over the medium term”.
Although the USD/JPY has taken a breather from its upward climb, the yen has had a horrendous December, losing around 600 pips. What explains the slumping Japanese currency? On Friday, the yen took a tumble following the release of the minutes of the December FOMC meeting, where several members came out in favor of ending the current monetary easing, known as QE4, sometime in 2013. As quantitative easing is a dollar-negative event, the possibility of an early end to the easing is bullish for the US dollar. As well, the new government in Japan is putting strong pressure on the Bank of Japan to adopt further monetary easing measures. The world’s third-largest economy is mired in recession, and the government is taking wants to aggressively tackle deflation in order to kick-start the stagnant economy. On Monday, Prime Minister Shinzo Abe again called for further easing by the Bank of Japan, and outlined steps to improve the economy based on three pillars – “a bold monetary policy, a flexible fiscal policy and a growth strategy aimed at stimulating private investment.” The new government is continuing with its aggressive economic platform, and announced that it will create an extra budget of 12 trillion yen ($136 billion), with up to 10 trillion yen set aside for economic stimulus packages.
Taking a look at US fundamentals, Friday’s US employment numbers brought no surprises. Non-Farm Employment Change rose to 155 thousand, which was slightly above the estimate of 150K. The Unemployment Rate edged up from 7.7% to 7.8%. However, the November rate was revised to 7.8%, so there was actually no change. ISM Non-Manufacturing climbed to 56.1 points, its best reading since March. This easily beat the estimate of 54.2 points.
USD/JPY for Monday, January 7, 2013
USD/JPY Jan 7 at 12:50 GMT
87.73 H: 88.23 L: 87.62
USD/JPY lost ground in the Asian session, as the pair dropped below the 88 line and consolidated at 87.69. The pair remains steady in the European session. On the downside, 87.36 is providing support. It is followed by 86.97. On the upside, there is weak resistance at 87.95. This line could fall if the yen changes direction and weakens. The next line of resistance is at 88.55.
• Current range: 87.36 to 87.95.
Further levels in both directions:
• Below: 87.36, 86.97, 86.37, 86, 85.62 and 85.15.
• Above: 87.95, 88.55, 89.31, 89.85, 90.23 and 90.91.
OANDA’s Open Position Ratios
With the USD/JPY showing strong fluctuation throughout last week, the ratio has shown movement, with a substantial increase in long positions. This indicates growing expectations that the yen will continue its slide. However, trader sentiment is currently almost evenly split, so the short position component cannot be discounted.
USD/JPY finally ran out of steam, following last week’s gains. The pair is showing much less movement as we begin the new trading week, and it could be a quiet day for USD/JPY.
• 23:50 Japanese Monetary Base Estimate 5.3%. Actual 11.8%.
*Key releases are highlighted in bold
*All release times are GMT
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