USD/JPY – Yen Weakness Continues after Weak Japanese Data

The Japanese yen continues to trade at multi-month highs, as Japanese data on Thursday (Dec. 27) pointed to continuing weakness in the Japanese economy. This had added to market expectations that the Bank of Japan will introduce further monetary easing steps. The yen continues to trade above the 86 level, and has dropped about 150 pips this week against the US dollar. There was mixed market news out of the US on Thursday, as CB Consumer Confidence, and New Home Sales both fell below the estimate. However, Unemployment Claims looked sharp, as the key employment indicator easily beat the forecast. In Friday’s market news, the highlight is US Pending Home Sales, which comes on the heels of Thursday’s New Home Sales. In Japan, Average Cash Earnings posted its first decline since September. Back in the US, optimism is fading that an agreement can be reached in Congress over fiscal cliff, with only a few days remaining before the January 1 deadline.

With the fiscal clock ticking ever louder, the impasse on Capitol Hill shows no signs of a last-minute breakthrough. After all the rhetoric, mud-slinging and finger pointing, Republicans and Democrats must try to find common ground and show more flexibility if the fiscal cliff is to be averted. If the sides can’t get their act together before January 1st, some $650 billion in tax hikes and spending cuts will automatically kick in. This double-jab could stifle the nascent economic recovery and push the US economy into recession in 2013. Negotiations between the sides are at a stalemate, and on Thursday, Senate Majority Leader Harry Reid warning that the US was headed over the cliff unless the Republicans gave up some ground on tax hikes. Negotiations will continue on Friday and the weekend, but the two sides continue to dig in their heels and blame the other for the gridlock.

Taking a look at market news, most of the data out of the US and Japan was disappointing. In the US, New Home Sales came in at 377 thousand, falling below the forecast of 382K. CB Consumer Confidence, a key consumer indicator, dropped sharply to 65.1 points, its lowest level since August. The estimate stood at 70.3 points. Unemployment Claims did look sharp, falling to 350K, easily beating the estimate of 365K. Pending Home Sales will be released later on Friday, the second key housing indicator in as many days. If this release also falls below the forecast, it could be sign of weakness in the US housing sector, a key engine of economic growth. The mixed readings again raise concerns about the direction of the US economy and the durability of the economic recovery. With doubts continuing to linger about the health of the economy, the fiscal cliff is the last thing that the markets need, and negative market sentiment could take the wind out of the recovery as we enter 2013. In Japan, Household Spending looked weak, posting a gain of just 0.2%. This was well below the estimate of 0.8%. The CPI and Retail Sales were within expectations, but Preliminary Industrial Production slumped, declining by 1.7%. This was well off the estimate of -05%. The weak data is expected to put further pressure on the BOJ to take further easing steps, so we could see the US dollar continue to pummel the Japanese yen.

USD/JPY for Friday, Dec 28, 2012

USD/JPY Dec 28 at 12:20 GMT

86.09 H: 86.55 L: 85.95

USD/JPY Technical

S3 S2 S1 R1 R2 R3
84.15 85.62 86 86.37 86.97 87.36

USD/JPY continues to weaken, and the pair has broken through resistance at the significant 86 level. Until this line was breached on Thursday, it had held firm since August 2011. The pair briefly broke through resistance at 86.37, before retracting back towards the 86 line. The next resistance line is at 86.97. On the downside, the round number of 86 is providing weak support. This is followed by support at 85.15.
• Current range: 86 to 86.37
Further levels in both directions:
• Below: 86, 85.62, 85.15, 84.75, 84.14, 83.44, 83.12 and 82.37
• Above: 86.37, 86.97, 87.36, 87.95 and 88.55.

OANDA’s Open Position Ratios
The USD/JPY ratio is steady, with a very slight bias towards short positions. This indicates that trader sentiment is almost evenly split, even though USD/JPY continues to trade a very high levels. If the yen continues to lose ground, we will likely see the ratio show some change as long positions continue to be filled.
There is more room for the pair’s upward trend to continue, as the new Prime Minister, Shinzo Abe, aggressively pursues economic measures which will put more pressure on the yen. The fiscal cliff crisis will continue to impact on USD/JPY, with positive developments being dollar negative, while pessimistic news will sour market sentiment and push investors to seek the safety of the US dollar.

USD/JPY Fundamentals
• 1:30 Japanese Average Cash Earnings. Estimate: -0.4%. Actual -1.1%.
• 14:45 US Chicago PMI. Estimate: 51.2 points.
• 15:00 US Pending Home Sales. Estimate: -0.3%.
• 15:30 US Natural Gas Storage. Estimate: -73B.
*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.