USD/JPY – Dollar Dips Below 104

After strong gains last week, USD/JPY has moved slightly lower, and is trading slightly below the 104 line in Monday’s European session. It’s a quiet start to the week, as Japanese markets are closed for a bank holiday. In the US, today’s highlight is UoM Consumer Sentiment.

There were no surprises last week from the Bank of Japan, which issued a Monetary Policy Statement on Friday. As expected, the Bank is holding steady with its monetary base and asset purchase programs. The BOJ said it will continue to increase the monetary base by 60-70 trillion yen annually and the purchase of Japanese government bonds by 50 trillion each year. The Bank’s aggressive monetary policy has revived the economy and put the breaks on deflation, but has severely weakened the yen, which is trading at five-year lows against the US dollar.

US releases ended on a positive note last week, as GDP climbed 4.1% in Q3, compared to 2.6% in the previous quarter. This was the indicator’s sharpest gain since Q1 of 2010. The estimate stood at 3.6%. Meanwhile, Unemployment Claims jumped to 379 thousand claims last week, up from 368 thousand the week before. This was well above the estimate of 336 thousand. The previous release’s weak numbers were attributed to the holiday season, but two consecutive poor releases will certainly not comfort the markets. There was more bad news to follow, as Existing Home Sales and the Philly Fed Manufacturing Index fell short of their estimates.

The markets are still buzzing after last week’s announcement by the Federal Reserve that it would begin tapering its QE program by $10 billion a month, commencing in January. This will reduce the Fed’s asset purchases to $75 billion every month, comprised of $40 billion in Treasuries and $35 billion in mortgage bonds. The announcement came as somewhat of a surprise, as most analysts had expected the Fed to hold off on any QE reductions until early next year. The dollar took full advantage and shot up about 160 points against the slumping yen.

In its dramatic tapering announcement, the Federal Reserve was careful to separate tapering from rate hike expectations. Fed chairman Bernard Bernanke stated that interest rates are likely to remain low even after the unemployment rate drops below 6.5%. Previously, the Fed had stated that it would start to consider rate increases when unemployment fell below this level. Bottom line? With the unemployment rate at 7.0%, it could be a while before we see higher interest rates in the US.

Overshadowed by the Fed’s bombshell announcement, a two-year, bipartisan budget agreement is sailing through Congress. The deal was overwhelmingly approved in the House of Representatives last week and the Senate followed suit on Wednesday, passing the measure by a vote of 64-36. The bill will now go the President Obama for his signature before becoming law. The agreement sets limits on government spending for two years and reduces the deficit by a modest $23 billion. Democrats and Republicans both had criticism of the proposal, but there is general agreement in Washington that the compromise reached is a positive step which removes the threat of a shutdown which paralyzed the government in October for 16 days.

USD/JPY for Monday, December 23, 2013

USD/JPY December 23 at 12:00 GMT

USD/JPY 103.87 H: 104.07 L: 103.85

USD/JPY Technical

• USD/JPY is showing little movement on Monday. The pair dropped below the 104 line earlier in the European session.
• 103.30 is providing support. This line could face pressure if the yen continues to improve. This is followed by support at 102.53.
• On the upside, 104.17 is providing weak resistance. This is followed by a resistance line at 105.70.
• Current range: 103.30 to 104.17

Further levels in both directions:

• Below: 103.30, 102.53, 101.19 and 100.00
• Above: 104.17, 105.70, 106.85, 107.73 and 108.77

OANDA’s Open Positions Ratio

USD/JPY ratio is made up of a narrow majority of long positions, reflecting a slight trader bias towards the dollar gaining ground against the yen.

The yen has edged lower in Monday trading and dropped below the 104 line. With no major releases out of the US today, we could see the pair’s movement continue to be very limited.

USD/JPY Fundamentals

• 13:30 US Core PCE Price Index. Estimate 0.1%.
• 13:30 US Personal Spending. Estimate 0.5%.
• 13:30 US Personal Income. Estimate 0.4%
• 14:55 US Revised UoM Consumer Sentiment. Estimate 82.9 points.
• 14:55 US Revised UoM Consumer Inflation Expectations.

*Key releases are highlighted in bold

*All release times are GMT

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