USD/JPY Outlook August 26-30

The US dollar was broadly stronger last week, and USD/JPY climbed about 120 points. The pair closed the week slightly below the 99 line, at 98.87. The upcoming week features eight events. Here’s an outlook for the Japanese events and an updated technical analysis for USD/JPY.

Weak Japanese trade balance numbers hurt the yen last week, as Japan’s trade deficit jumped in July, hitting a four-month high. The US dollar also got a boost from the FOMC minutes, as it’s clear that the Fed plans to taper QE, although the Fed isn’t letting on when it is considering taking action.

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

1. CSPI: Sunday, 23:50. This corporate inflation index has shown improvement pointing to some inflation in the Japanese economy after years of deflation. The index posted a gain of 0.4% in the July release and an identical gain is expected in August.
2. Retail Sales: Wednesday, 23:50. This event is the most important indicator of consumer spending, which is critical for economic growth. The indicator posted a strong gain of 1.6% in July, but the markets are expecting a sharp downturn, with an estimate of just 0.0%. Will the indicator surprise the markets with another solid gain?
3. Manufacturing PMI: Thursday, 23:15. Manufacturing PMI continues to post releases above the 50-point line, indicating expansion in the Japanese manufacturing sector. The markets will be looking for another reading above 50 in the August release.
4. Household Spending: Thursday, 23:30. This important consumer spending indicator has run into some trouble, posting two straight declines. The markets are expecting some improvement in the upcoming release, with an estimate of 0.4%. Will the indicator move into positive territory in the upcoming release?
5. Tokyo Core CPI: Thursday, 23:30. Tokyo Core CPI is the most important Japanese inflation indicator. It has been steadily improving and posted a gain of 0.3% in the July release. The upward trend is expected to continue, with an estimate of 0.4% for the August release.
6. Preliminary Industrial Production: Thursday, 23:50. This important manufacturing indicator has been very inconsistent, resulting in estimates which are often off the mark. After a disappointing decline of -3.3% last month, the markets are expecting a strong gain of 3.9% in August. Will the indicator meet or beat this rosy prediction?
7. Housing Starts: Friday, 5:00. Housing Starts have looked very strong lately, with double-digit gains in the past two releases. The markets are expecting another sharp gain in August, with an estimate of 14.5%.

*All times are GMT

USD/JPY Technical Analysis

USD/JPY started the week at 97.67. The pair dropped to a low of 97.32, but the dollar flexed some muscle as  USD/JPY climbed close to the 99 line, touching a high of 98.92. The pair closed the week at 98.97, as support at 98.90 (discussed last week) remains intact.

Live chart of USD/JPY:

Technical lines from top to bottom

We start with resistance at the round number of 104. This line was a key line in May 2008. At that time, USD/JPY was in the midst of a rally which saw the pair climb as high as 110.

102.50 was an important resistance line in late May but has been quiet since that time.

101.44 was the post-crisis high seen in April 2009, and has not been tested since mid-July. 100.85 was busy in July as the dollar pushed above the 100 level.

The significant 100 level saw a lot of activity in July. With the pair testing the 99 level last week, it cannot be considered safe.

98.90 was breached last week but remained intact at week’s end as a resistance line. It could be tested by the pair early in the week.

97.80 was quite busy in June and in late July. It has reverted to a support role as the pair recorded strong gains last week.

96.71 continues to provide support. It has some breathing room with USD/JPY trading at higher levels.

The round number of 95 is a psychologically significant line. It continues to provide support and 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 in July.

92.86 saw action in early March and again in early April. The latter date marked the low point of a yen rally which saw USD/JPY climb very close to the 100 level.

We are bullish on USD/JPY

As QE tapering is a dollar-positive event, continued speculation about when the Federal Reserve might take action has boosted the US dollar. The Federal Reserve hasn’t shown its cards, but the markets are looking for some action on this front as early as September. Japanese releases looked sluggish last week, and a repeat performance would likely result in the yen losing even more ground.