USD/JPY Outlook July 22-26

The Japanese yen was slightly down against the US dollar, as USD/JPY broke above the 100 level, ending the week at 100.64. The upcoming week is very quiet, with only four events on the schedule. Here’s an outlook for the Japanese events and an updated technical analysis for USD/JPY.

US Federal Reserve chair Bernard Bernanke testified before Congress last week, but there were no fireworks or drama, and the currency markets did not show much reaction. The US did release some strong employment and manufacturing numbers late in the week, and this gave a slight boost to the US dollar.

USD/JPY daily chart with support and resistance lines on it. Click to enlarge: 

1. Upper House Elections: Sunday, All Day. Japanese voters go to the polls on Sunday for elections to Upper House in parliament. Half of the 242 seats are being contested, and Prime Minister Shinzo Abe’s LDP party is favored to win a majority. An electoral win would give the LDP control of both houses of parliament, and would make it easier for Abe to continue his aggressive economic agenda, popularly referred to as “Abenomics”.
2. Trade Balance: Tuesday, 23:50. Japan has not posted a monthly trade surplus in over two years, and the markets would be pleased just to see a narrowing of the deficit. The June release came in at -0.82 trillion yen, lower than the estimate of -0.89 trillion. The markets are expecting an improvement in the upcoming release, with an estimate of -0.58 trillion yen.
3. CSPI: Wednesday, 23:50. This corporate inflation indicator climbed to 0.3%, its highest reading this year. This beat the market estimate of 0.1%. The markets have raised the bar, and are anticipating a very strong reading of a 0.7% gain. Will the indicator be able to meet or beat this rosy prediction?
4. Tokyo Core CPI: Thursday, 23:30. After years of readings in negative territory, this important inflation indicator has posted two straight readings above zero. The previous release came in at 0.2%, matching the forecast. The July estimate stands at 0.3%. Another gain would point to more inflation in the economy and would be bullish for the yen.

*All times are GMT.

USD/JPY Technical Analysis

USD/JPY started the week just below the 100 level, at 99.95. The pair dropped to a low of 98.89, testing support at 98.90 (discussed last week). but then bounced back strongly, crossing the 100 line and climbing to a high of 100.86. USD/JPY closed the week at 100.64.

Live chart of USD/JPY:

Technical lines from top to bottom

105.50 is above the round number of 105 and worked as resistance during 2008. It reverted to support later in the year, and is back providing strong resistance. Below, 104.60 slowed the pair’s rise in early 2008.

103.50 provided support for the pair in July and September 2008 before reverting to a resistance line in October 2008. The line has been quiet since then but was briefly breached in mid-May of this year. Next, 102.80 capped the pair in May 2013.

101.44, which was the post-crisis high seen in April 2009, started the week as very weak resistance, but is stronger with the yen rising sharply and trading near the 99 line. 100.85 was briefly breached late in the week, but remains in place as the pair retracted slightly. It is providing weak resistance and could see action early in the week.

The significant 100 level continues to be active, and has reverted to a weak support role. It could face pressure if the yen shows any improvement.

USD/JPY continues to receive support at 98.90. This line held steady as the yen pushed higher early in the week.

97.80 was quite busy in June, and continues in a support role. It has strengthened with the pair trading over 100.

The March 2013 peak of 96.71 is providing support. This is followed by the round number of 95, which was last tested in mid-June.

The final line for now is 93.79. This marked the low point of a rally by the dollar which started in mid-June and saw the pair climb to the mid-101 range earlier this month.

I am neutral on USD/JPY

The Japanese economy is showing signs of improvement, and the BOJ expressed cautious optimism in its recent policy meeting. If this week’s inflation releases continue to point upward, this could improve market sentiment and bolster the yen. Over in the US, the hot issue of QE tapering remains unresolved after Bernanke’s uneventful testimony before Congress. Overshadowed by Bernanke were some strong US releases, and if US data looks solid this week, the dollar could gain strength.