USD/JPY – Yen Flexes Muscles as BOJ Holds Policy Meeting

The yen has posted sharp gains against the US dollar in Wednesday trading. USD/JPY is testing the 100 level in the European session. The US and Japanese central  banks are in the spotlight today, as the BOJ meets for a two-day policy meeting, while the Federal Reserve releases the minutes of the most recent FOMC policy meeting. On Tuesday, Japanese Tertiary Industry Activity and Corporate Goods Price Index both met market expectations.  Looking at Wednesday’s releases, Japanese Consumer Confidence disappointed, hitting a four-month low. The US holds a 10-year bond auction on Wednesday, and Fed chief Bernard Bernanke will address an economic conference in Cambridge, Mass.

The markets continue to be busy with Japanese releases. Tertiary Industry Activity climbed to 1.2%, its best performance since February. The estimate stood at 0.9%. There was more good news from the Corporate Goods Price Index, which jumped from 0.6% to 1.2%, matching the forecast. This is the inflation index’s sharpest rise since January 2012, and points to inflation in the economy. One of the foremost aims of the country’s monetary policy has been to stamp out deflation, so the CGPI reading is certainly welcome news. The Consumer Confidence release was not as sharp, falling from 45.7 points to 45.3, well off the estimate of 44.3.

The Bank of Japan is holding a two-day policy meeting starting Wednesday. The markets are not expecting any dramatic announcements, as the BOJ continues to implement its aggressive monetary policy which commenced back in April. At that time, the BOJ said it planned to pump JPY 130 trillion into the economy within two years, and committed to doubling the monetary base to JPY 270 trillion by the end of 2014. These measures have sent the yen tumbling to multi-year lows, but the economy has been slow to respond to the monetary shock therapy. Lately, however, economic indicators have shown improvement, including inflation indicators, which have pointed upwards.

With the US posting strong employment numbers and the recovery looking stronger, there is increased speculation that the Federal Reserve will taper QE later this year. Federal Reserve chair Bernard Bernanke has stated that the Fed would act by the end of the year if the economy continues to improve, resulting in a massive sell-off of US bonds, which raised yields and bolstered the US dollar. The markets are eagerly waiting for the release on Wednesday of the FOMC’s last recent policy meeting. Traders should be prepared for some volatility from USD/JPY after this major release. Bernanke will be addressing an economic conference later on Wednesday, and analysts will be monitoring the speech for any clues as to the Fed’s future monetary policy.

USD/JPY for Wednesday, July 10, 2013

USD/JPY 100.11 H: 101.19 L: 99.79

USD/JPY Technical

USD/JPY has dropped sharply and dipped below the 100 line in the European session, before bouncing back above this level. The pair is facing resistance at 100.85. This is followed by 101.66, which has strengthened as the yen trades at lower levels. On the downside, the pair is receiving support at the critical round number of 100. This line was breached earlier on Wednesday, and could continue to be tested. There is stronger support at 0.9957.

Current range: 100.00 to 100.85

Further levels in both directions:

• Below: 100.00, 99.57, 98.43, 97.83 and 97.18
• Above: 100.85, 101.66, 102.52, 1.03.30 and 105.16

OANDA’s Open Positions Ratio

USD/JPY ratio is pointing to movement towards short positions in Wednesday trading. This is consistent with the pair’s current movement, as the yen has posted strong gains against the dollar. Long positions continue to dominate the open positions, indicating that trader sentiment is biased in favor of the dollar recovering and moving upwards.

After a quiet day on Tuesday, USD/JPY has dropped sharply on Wednesday. Will the yen move under the 100 line? With the Federal Reserve releasing minutes of the most recent policy meeting later in the day, we could see some volatility from the pair.

USD/JPY Fundamentals

• 5:00 Japanese Consumer Confidence. Estimate 47.2 points. Actual 44.3 points.
• 14:00 US Wholesale Inventories. Estimate 0.3%
• 14:30 US Crude Inventories. Estimate -2.9M.
• 17:00 US 10-year Bond Auction.
• 18:00 US FOMC Meeting Minutes.
• 20:10 US Federal Reserve Chairman Bernard Bernanke Speaks.
• 23:50 Japanese Core Machinery Orders. Estimate 1.9%.

*Key releases are highlighted in bold

*All release times are GMT

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.