USD/JPY Outlook – July 29-August 2

The Japanese yen flexed some muscle late in the week, as USD/JPY dropped over 200 points on the week. The pair closed just above the 98 line, at 98.09. The upcoming week is fairly busy, with nine events on the schedule. Here’s an outlook for the Japanese events and an updated technical analysis for USD/JPY.

The yen managed to break away from the 100 level late in the week, following solid Japanese inflation releases. As well, US manufacturing and employment numbers disappointed on Thursday, hurting the dollar.

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

1. Retail Sales: Sunday, 23:50. Retail Sales has been all over the map, making accurate predictions difficult. The indicator posted a nice gain of 0.8%, in the June release, its sharpest gain this year. The markets are expecting a much stronger reading this time around, with an estimate of 1.7%. Will the indicator be able to meet or  beat this rosy prediction?
2. Household Spending: Monday, 23:30. With Japanese indicators showing improvement recently, the markets were surprised that Household Spending posted a sharp drop last month, the first decline of 2o13. The indicator declined 1.6%, while the estimate stood at 1.5%. The markets are expecting a sharp turnaround this month, with an estimate of a 1.2% gain.
3. Preliminary Industrial Production: Monday, 23:50. This important manufacturing release has looked solid in 2013, posting gains every month this year except once. However, the markets are bracing for a sharp drop this month, with an estimate of -1.4%. Will the indicator surprise the markets and remain in positive territory?
4. BOJ Governor Haruhiko Kuroda Speaks: Tuesday, Tentative. Kuroda will address the Research Institute in Tokyo. Analysts will be listening closely for any clues as to future monetary policy. Although the BOJ is expected to keep the present course, any unexpected statement from the governor can affect the currency markets.
5. Manufacturing PMI: Tuesday, 23:15. This index is a third-tier release, so it usually does not have a major impact on USD/JPY. The PMI has been steadily rising in 2013, and has been above the 50-point level since February, which indicates steady expansion in the manufacturing sector. The markets are hoping that the upward trend continues in July.
6. Average Cash Earnings: Wednesday, 1:30. This indicator focuses on employment income available to workers, and is an important consumer spending release. The indicator disappointed last month, dropping to a flat 0.0%, well off the estimate of 0.6%. The forecast for the July release calls for a modest gain of 0.2%.
7. Housing Starts: Wednesday, 5:00. This indicator tends to be volatile, resulting in predictions which are well off the mark. The previous release is a case in point, with the indicator posting a sharp gain of 14.5%. The estimate stood at 6.3%. The markets are expecting another strong gain this month, with an estimate of 15.9%, which would  be a record for 2013. Will the indicator be able to meet the market expectations?
8. 10-year Bond Auction: Thursday, 3:45. 10-year bonds posted an average yield of 0.88%, last month, almost unchanged from the June release. The markets are not expecting any major changes in the upcoming auction.
9. Monetary Base: Thursday, 23:30. The BOJ continues to pump money into circulation as part of its aggressive monetary policy. Monetary Base has been steadily increasing in 2013, and rose to 36.0% in the previous release. However, for the first time in 2013, this was below estimate, as the forecast stood at 41.2%. The indicator is expected to continue to rise, with an estimate of 43.2% for the July release.

*All times are GMT.

USD/JPY Technical Analysis

USD/JPY started the week at 100.36. The pair touched a high of 100.45, but the yen then posted strong gains, as the pair dipped below the 98 line, dropping to a low of 97.96. USD/JPY closed the week at 98.09, as the support line of 97.80 (discussed last week) remained intact at the end of the trading week.

Live chart of USD/JPY:

Technical lines from top to bottom

With the yen posting strong gains, we start from lower ground.

103.50 provided support for the pair in July and September 2008 before reverting to a resistance line in October 2008. The line had been quiet since then but was briefly breached in mid-May. Next, 102.50 was a key resistance line in late May.

101.44, which was the post-crisis high seen in April 2009, and has not been tested since mid-July. 100.85 was busy earlier in July. It has strengthened as the pair trades at lower levels.

The significant 100 level has seen a lot of activity, and USD/JPY see-sawed around this line right up until Friday, when the yen pushed higher and managed to break out of the shadow of this line.

The pair blew past 98.90, which was providing weak support at the start of the week. This line now finds itself in a resistance role, protecting the round number of 99.00.

97.80 was quite busy in June, and was breached late in the week, but held as the pair bounced back above the 98 line. It is providing weak support, and could face strong pressure early in the week.

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.

93.79 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.

The final support level for now is 92.86. This line saw action in early March and again in early April. The latter date marked the low point of a yen rally which saw the currency climb very close to the 100 level.

I am bearish on USD/JPY

The Japanese economy continues to show signs of improvement. Last week’s inflation releases point upwards, which appears to show that Abenomics is achieving results. Further positive Japanese releases could boost the yen, although traders should remain on their toes for any hints from the Federal Reserve about QE, which would likely be a market-mover.