USD/JPY Outlook Jan. 27-31

The Japanese yen showed some strength late in the week, and gained over two cents last week. The pair closed at the 102 line. The upcoming week has just eight releases. Here is an outlook on the major market-movers and an updated technical analysis for USD/JPY.

Japanese events were uneventful, as the BOJ held course with its monetary scheme. The yen posted strong gains late in the week, taking advantage of a disappointing US Existing Home Sales, which dropped for the fourth straight month.

Click to enlarge:  

1. Monetary Policy Meeting Minutes:Sunday, 23:50. The minutes  provide a detailed record of the previous BOJ policy meeting. At the meeting, the Bank indicated that it was holding steady with its aggressive monetary policy. Analysts will be looking for differences of opinion amongst policymakers at the meeting.
2. Trade Balance: Sunday, 23:50. Trade Balance and currency demand are closely linked because foreigners need to purchase the domestic currency to pay for Japanese exports. Japan continues to post trade deficits and the past three have been marked by deficits which were higher than the estimates. Little change is expected in the upcoming release, with an estimate of -1.33 trillion.
3. Retail Sales: Wednesday, 23:50. Retail Sales is the most important consumer spending indicator and should be treated as a market-mover. The indicator shot up in November, posting a gain of 4.0%, well above the estimate of 2.9%. The estimate for the December release stands at 3.9%. Will the indicator repeat and beat the prediction?
4. Manufacturing PMI: Thursday, 23:15.  This index continues to move higher and has been in expansion mode for about a year, with readings above the 50-point level. The markets are hoping that the upward trend continues in the December release.
5. Household Spending: Thursday, 23:30. This important consumer spending indicator has been inconsistent, making accurate forecasts difficult. The indicator posted a weak gain of 0.2% in November, well off the estimate of 1.9%. The markets are expecting a strong turnaround in the upcoming release, with an estimate of 1.3%.
6. Tokyo Core CPI: Thursday, 23:30. This is the most important inflation indicator. The index has been rising in recent readings, hitting 0.7% in the previous release. However, this is well below the BOJ inflation target of 2.0%. The estimate for the upcoming release is unchanged, at 0.7%.
7. Preliminary Industrial Production: Thursday, 23:50. This manufacturing indicator has taken dropped sharply in recent readings, posting a weak gain of 0.1% in November. The estimate stood at 0.6%. The markets are expecting much better news from the December release, with the estimate standing at 1.5%.
8. Housing Starts: Friday, 5:00. This minor release looked sharp last month, posting a gain of 14.1%. This crushed the estimate of 9.5%. Another strong reading is expected in the upcoming release, with an estimate of 13.9%.

* All times are GMT.

USD/JPY Technical Analysis

USD/JPY started the week at 104.24. The pair climbed to a high of 104.84 but then dropped sharply, dropping all the way to 102.00. breaking through support at 102.50 (discussed last week). USD/JPY closed the week at 102.19.

Live chart of USD/JPY:

Technical lines from top to bottom

With USD/JPY posting sharp losses, we start at lower ground:

108.38 has remained intact since September 2008. At that time, USD/JPY was in a downward spiral which saw it drop below the 0.90 line.

106.66 has held firm since November 2008.  This is followed by resistance at 105.70 which continues to provide strong resistance.

104.65 has seen a lot of activity since late December. It was briefly breached as USD/JPY moved higher before reversing directions.

The first line of support is at the round number of 104. This was a key line back in May 2008 and has reverted to a resistance role after strong gains by the yen last week.

102.50 was breached late in the week as the yen shot higher. It has reverted to a support role. As a weak line, it could be tested early in the week.

101.44 was the post-crisis high seen in April 2009, and continues to provide support.

100.85 saw activity in July as the dollar showed strength against the yen. It is protecting the key level of 100.

The round number of 100 is a key psychological level. It is providing USD/JPY with steady support.

98.80 has remained firm since early November, when the dollar began a rally which saw it climb above the 105 line.

The final support level for now is 97.75. This line marked the start of a dollar rally in October, which saw the pair break above the 105 line.

I am bullish on USD/JPY

The yen finally showed some muscle last week, but it remains to be seen if the yen can consolidate these gains. The Federal Reserve has finally started to taper QE, and if the Fed acts  again next week, the greenback could head back up. As well, the Bank of Japan is moving full steam ahead with its current aggressive monetary program, which could lead to further weakening of the Japanese currency. The yen came out of 2013 battered and bruised, as the currency lost about 17% of its value over the course of the year. With many key US releases pointing upwards, last week’s strong performance by the yen could be a temporary blip.