USD/JPY – Japan Announces ESM Bond Purchase

On Tuesday, the Japanese government announced that it would purchase bonds from the European Stability Mechanism (ESM) starting on Tuesday. The Japanese government said that the move would increase stability in the Eurozone and help stabilize the yen. So far, the yen has not reacted to the news, and continues to trade in the mid-87 range. There are no Japanese releases today, and only two US releases, both of which are third-tier – IBD/TIPP Economic Optimism and Consumer Credit.

On Tuesday, Japanese Finance Minister Taro Aso stated on Tuesday that Japan plans to purchase bonds from the European Stability Mechanism, which is the Eurozone’s bailout fund. The ECB was delighted with the news, and said that the ESM would begin issuing immediately. The first debt auction will be on Tuesday, with three-month notes being offered with a value of about 2 billion euros. This will be the first time that the ESM has issued securities since it was formed last October. Finance Minister Aso said that the move will help bring more stability to the Eurozone, which in turn will also help stabilize the yen and other currencies. Japan has already purchased about 7 billion euros from the European Financial Stability Facility (EFSF). The EFSF was replaced in October with the ESM, but both bailout funds will continue to function until the EFSF is phased out in mid-2013. Clearly, the Japanese government’s primary motivation in purchasing bonds from the ESM is not to save the Euro-zone. The purchase of the bonds, which will be made with Japanese yen, will allow Prime Minister Shinzo Abe to continue to weaken the Japanese currency (and strengthen the euro at the same time) without sustaining further criticism from the US and other countries, who are worried about the aggressive economic stance of the new government and its call for unlimited easing by the Bank of Japan. There is unease in the currency markets at the fact that the Japanese currency has declined about 8 per cent against the US dollar since mid-November. The new Japanese government, which won the elections in December, is determined to stamp out deflation, which has been a long-term problem for the sluggish Japanese economy.

There was a collective sigh of relief from the markets last week, as the fiscal cliff agreement was reached in the US Congress. However, any celebrating would be premature, as it appears that this was just the first round of more bruising battles ahead. The hard-fought agreement, which was preceded by months of acrimony and bad blood between the Republicans and Democrats, was criticized by many analysts and economists as a deal comprised of the lowest common denominator which both sides could reluctantly compromise and agree on. However, the agreement left two critical issues for another day – the debt ceiling and spending cuts. The problem is, the clock on those issues is also winding down, as the debt ceiling will be reached in February, and action will have to be taken to avoid a default on the country’s debt. Otherwise, the real possibility of a US default will likely cause turmoil in the markets.

Taking a look at fundamentals, Tuesday is a quiet day, with only two releases. Both are out of the US. IBD/TIPP Economic Optimism has been falling, as the indicator continues to point to declining confidence in the US economy. Another weak reading could hurt the US dollar. Consumer Credit looked sharp in December, but the markets are expecting a drop in the upcoming release.

USD/JPY for Tuesday, January 8, 2013

USD/JPY Jan 8 at 11:35 GMT

87.47 H: 87.49 L: 87.42

USD/JPY Technical

S3 S2 S1 R1 R2 R3
86.37 86.97 87.36 87.95 88.55 89.31

USD/JPY is steady, and the proximate support and resistance levels (S1 and R1 above) remain in place. There is weak support at 87.36, and this line be tested if the yen shows any upward movement. On the upside, 87.95 is now providing resistance after the yen posted gains on Monday. This is followed by resistance 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

The USD/JPY ratio has shown some slight movement away from long positions. This indicates a slight shift in trader sentiment, with a bias towards the yen strengthening. This is indeed what occurred on Monday, as the yen posted strong gains against the dollar. However, trader sentiment is a close split, and the pair is currently showing little movement.

The yen improved on Monday, but has since coughed up much of those gains. The pair is having difficulty finding its footing, and with little in the way of economic releases on Tuesday, so we could see modest moves in either direction.

USD/JPY Fundamentals

• 15:00 US IBD/TIPP Economic Optimism. Estimate 46.3 points
• 20:00 US Consumer Credit. Estimate 12.9B

*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.

Kenny Fisher

Kenny Fisher

Market Analyst at OANDA
A highly experienced financial market analyst with a focus on fundamental and macroeconomic analysis, Kenny Fisher’s daily commentary covers a broad range of markets including forex, equities and commodities. His work has been published in major online financial publications including, Seeking Alpha and FXStreet. Kenny has been a MarketPulse contributor since 2012.