USD/JPY – Dollar Recovers, Pushes Above 100

The yen has lost ground on Wednesday, surrendering most of the gains it garnered early in the week against the US dollar. USD/JPY was back above the crucial 100 line in Wednesday’s European session. Taking a look at what’s in store on Wednesday, the major event is US Existing Home Sales. Japan will release CSPI, and the markets have high expectations from the corporate inflation indicator. On Tuesday, US releases did not impress. HPI came in at 0.7%, missing the estimate of 0.9%. The Richmond Manufacturing Index was a disaster, dropping to a six-month low. In Japan, Trade Balance improved, posting its best reading since September 2012.

US releases have run into some turbulence this week. Existing Home Sales slid from 5.18 million to 5.08 million. Clearly, the markets were expecting too much, with an estimate of 5.27 million. The markets will be hoping for better news from New Home Sales on Wednesday. This indicator has now improved for the past three consecutive releases. The housing industry is a vital component of economic growth, and both of these housing releases are market-movers. On Tuesday, the Richmond Manufacturing Index plunged from +8 points to -11 points, its worst reading since September 2012. Last week, the Empire State Manufacturing Index and Philly Fed Manufacturing Index looked sharp, and the markets had expected the Richmond Manufacturing Index to follow suit. The weak figure is an indication that the manufacturing sector, which has been a sore spot in the US recovery, continues to show weakness.

There was good news for Japanese Prime Minister Shinzo Abe on Sunday, as the ruling coalition, led by Abe’s LDP party, won a majority of the 121 seats contested in elections to the upper house of parliament. This gives the coalition control of both the upper and lower houses, and greatly strengthens Abe’s position as prime minister. Abe’s aggressive economic platform is starting to show results, with improving data and signs of inflation in the economy. The government has stated its wants to implement deregulation steps in order to promote growth, but this promises to be a stiff challenge, as such measures promise to be unpopular with special interest groups and others who have supported Abe until now.

Japanese releases continue to point upwards. The trade deficit narrowed from -0.82 trillion yen to -0.60 trillion, its lowest level since September 2012. This was just shy of the estimate of -0.58 trillion yen. The weak yen, which continues to flirt with the 100 level, is the key contributor to an improving trade balance. If this trend continues, we could see Japan start to post trade surpluses in the near future.

The question of when the Fed will pull the trigger on QE tapering continues to preoccupy the markets. Despite the zigzagging we’ve seen on this issue from the Fed, there is a strong likelihood that this will take place before the end of 2013, barring a major downturn by the US economy. There is speculation that the Fed could take action in September. Appearing on Capitol Hill last week, Fed chair Bernard Bernanke was careful not to get pinned down with any specific deadlines, and instead said that stronger growth and lower unemployment were the key factors to any action over QE. The problem with this approach is the markets remain in the dark, and every strong US release fuels expectation about QE tapering, while a weak release does the opposite. This of course, contributes to market instability, as we’ve seen in recent months with the US dollar. The G20 seemed to have this issue in mind when it issued a statement that member countries had agreed that future monetary policy moves would be “carefully calibrated and clearly communicated”. Whether the Fed will suddenly show its cards is doubtful, especially in light of Bernanke’s vague and rather dull performance in front of Congress last week.

USD/JPY for Wednesday, July 24, 2013

USD/JPY 100.08 H: 100.16 L: 99.42

USD/JPY Technical

USD/JPY has pushed back above the 100 line in Wednesday trading. In the European session, the pair showed some strength and broke above this key barrier. The pair is facing resistance at 100.85. This is followed by resistance at 101.66. This line has not been tested since the end of May.

On the downside, the pair is testing the 100 level, which continues to be the center of attention. 99.45 is the next support level.

• Current range: 100.00 to 100.85

Further levels in both directions:

• Below: 100.00, 99.45, 98.43, 97.83, 97.18 and 0.9620
• Above: 100.85, 101.66, 102.52 and 103.22

OANDA’s Open Positions Ratio

USD/JPY ratio has looked very quiet since the start of the week, but is showing movement towards short positions in Wednesday trading. This is not reflected in the current movement of the pair, as the dollar has posted gains at the expense of the yen. Long positions continue to enjoy a sizeable majority of open positions, indicating that trader sentiment is biased in favor of the pair continuing to move upwards.

USD/JPY Fundamentals

• 13:00 US Flash Manufacturing PMI. Estimate 52.5 points.
• 14:00 US New Home Sales. Estimate 482K.
• 14:30 US Crude Oil Inventories. Estimate -2.5M.
• 23:50 Japanese Corporate Services Price Index. Estimate 0.7%.

*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.