USD/JPY – Edges Lower Ahead of Fed Policy Statement

USD/JPY is slightly lower in Wednesday trading. The yen has recovered a large part of Tuesday’s losses, as the pair trades just above the 95 level. In economic news, the Japanese trade deficit widened, but managed to beat the market estimate. Today’s highlight is the FOMC policy statement, and the markets will likely react after hearing from the Federal Reserve. On Tuesday, the markets got their first glimpse of US key data, and the results were mixed. Building Permits and Core CPI, both key events, came in as expected. However, Housing Starts disappointed, as it fell below the estimate. There are no Japanese releases scheduled on Wednesday.

All eyes will be glued to the US Federal Reserve on Wednesday, as the FOMC releases an highly anticipated policy statement. The markets will be particularly interested in what the Fed has to say with regard to its quantitative easing program. Speculation has been growing that the Fed could scale back QE later in the year, and this has had a very strong impact on stocks, commodities and the US dollar. The Federal Reserve has repeatedly stated that it will stick with the current program until it sees an improvement in the US economy, especially in the employment market. Currently the Fed purchases $85 billion in assets every month. If the Fed does take action or even hint at a move to tighten QE, we can expect the dollar to move higher against the major currencies.

The Japanese government and the BOJ have implemented extreme monetary stimulus in order to kick-start the anemic economy, popularly referred to as “Abenomics”. Has the plan been a success? The jury is still out on this question. There are some hopeful signs that the economy has picked up, such as an improving GDP, which expanded at an annual rate of 4.1% for the first three months of 2013. This is stronger growth than most of Japan’s trading partners. The low yen has boosted exports, and private spending is up. However, deflationary trends remain in the economy, and Abenomics cannot be considered a success until we see more inflationary indications in the economy. The government has declared a target of 2% inflation, but will likely have a tough time reaching this goal. Another major problem is the country’s huge debt, which is more than double the size of the economy of $5 trillion.

G8 summits are often little more than photo-ops, as confident world leaders shake hands and reiterate their commitment to take steps to improve the global economy. However, this year’s G8 meeting in Northern Ireland served more than the usual fare, as the G8 leaders used the occasion to announce the start of negotiations on a free trade agreement between the European Union and the United States. The stakes are very high – the EU and US produce 50% of the global output, and a third of world trade. The deal would be the largest bilateral trade pact ever, and could add up to $100 billion to the economies of each partner. Negotiations will get underway in Washington next month, with a deal expected to be signed by the end of 2014.

USD/JPY for Wednesday, June 19, 2013

USD/JPY 95.13 H: 95.59 L: 94.83

USD/JPY Technical

USD/JPY has edged lower, as the proximate support and resistance lines remain intact (S1 and R1 above). The line of 94.91 is providing support. This is a weak line, and could be tested if the yen continues to improve. The next support level is at 94.02, protecting the 94 line. On the upside, we encounter resistance at 96.03. This is followed by stronger resistance at 97.18.

• Current range: 94.91 to 96.03

Further levels in both directions:

• Below: 94.91, 94.02, 92.73, 91.62 and 91.02
• Above: 96.03, 97.18, 98.94, 99.57 and 100.00

OANDA’s Open Positions Ratio

USD/JPY ratio is back in action after a lull on Tuesday. The ratio is pointing to movement towards short positions. This is reflected in the current movement of the pair, as the dollar  has lost ground against the yen. At the same time, long positions have a significant majority in the ratio, signaling a strong bias towards further gains by the US dollar.

USD/JPY has been quiet in Wednesday trading, but that could quickly change after the Fed policy statement later today. If there any hints about scaling back QE, we could be in for some volatility from the pair.

USD/JPY Fundamentals

• 14:30 US Crude Oil Inventories. Estimate 0.5M.
• 18:00 US FOMC Economic Projections.
• 18:00 US FOMC Statement.
• 18:00 US Federal Funds Rate. Estimate <0.25%.
• 18:00 US FOMC Press Conference.

*Key releases are highlighted in bold

*All release times are GMT

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