Market Overview

USD/JPY – BOJ faces Pressure over Inflation Stance

USD/JPY continues to show weakness, as it trades in the mid-84 range. The Bank of Japan is facing more pressure from the incoming Japanese Prime Minister with regard to the BoJ's inflation targets. The US enjoyed a week of strong data, but the fiscal cliff crisis continues to weigh on market sentiment, with no breakthrough in sight.

With a dizzying pace of developments in Japan, USD/JPY traders and analysts should not anticipate a quiet week as we wind up 2012. Incoming Prime Minister Shinzo Abe continues to put strong pressure on the BOJ following his party's resounding victory in the recent elections. Abe is a strong support of unlimited monetary easing in order to kick-start the lackluster Japanese economy, and wasted no time in strong-arming the central bank into taking more aggressive easing steps. This led to the BOJ increasing it asset-purchase program by JPY 110 trillion last week. However, the BOJ did not alter its target of 1.0% inflation. Abe has indicated he is not satisfied with this modest goal and wants to see a 2.0% target, in order to combat deflation.

The incoming prime minister is not pulling any punches, as he has pledged to replace the current BOJ Governor, Masaaki Shirakawa, in early 2013. He has also threatened to reduce the BOJ's independence if his inflation target is not met. The new government seems intent on taking immediate steps to bolster the ailing Japanese economy, and USD/JPY could show some volatility as further measures are taken.

Recent US data continues to point to a stronger economic recovery, and last week's releases continued the trend. US GDP, Existing Home Sales and the Philly Fed Manufacturing Index all beating the market forecast. The one exception was Unemployment Claims, which was higher than expected. On Friday, US Core Durable Goods Orders surprised the markets with a robust 1.6% gain. The markets had forecast a slight decline, marking the third straight reading that the markets have badly underestimated this key manufacturing indicator.

The market continues to be concerned with the fiscal cliff crisis, as the clock continues its count down before a series of automatic tax hikes and spending cuts kick in. With Republicans and Democrats far apart on how to tackle spending cuts and tax hikes, the fiscal cliff negotiations in Congress are gridlocked, as each side continues to attack and blame the other for the impasse. There were some red faces on the Republican side last week, as Republican House Leader John Boehner threatened to pass a “Plan B” that would have avoided tax hikes for all Americans earning less than $1 million per year.

In the end the motion was withdrawn to due lack of support on the Republican side. The Republicans took a gamble on Plan B, hoping that it would put the ball back in the Democrat's court, and embarrass the White House if it went ahead and vetoed the motion. In the end, it was House Leader Boehner who looked bad, as Plan B turned out to be a futile political maneuver. Meanwhile, Congress is adjourned until December 27th, just days before the fiscal cliff kicks in. The crisis could have a major impact on USD/JPY if there are developments on Capital Hill during the course of the week.

USD/JPY for Monday, Dec 24, 2012

USD/JPY Dec 24 at 13:55 GMT

84.53 H: 84.54 L: 84.32

USD/JPY Technical

S3 S2 S1 R1 R2 R3
83.12 83.44 84.14 84.75 85.15 85.62

 

USD/JPY continues to trade at high levels. The pair was steady in the Asian session, and consolidated late in the session at 84.35. In the European session, the pair has moved higher, crossing above 84.50. The resistance line of 84.75 remains firm, but with the yen showing weakness, for how long? On the downside, 84.14 has strengthened as USD/JPY trades at higher levels.
• Current range: 84.14 to 84.75
Further levels in both directions:
• Below: 84.14, 83.44, 83.12, 82.37, 81.83 and 80.
• Above: 84.75, 85.15, 85.62, 86 and 86.97.

OANDA's Open Position Ratios
With the yen showing weakness and trading above 84.50, we continue to see an increase in short positions, reflecting growing sentiment that the Japanese currency could continue to fall further. However, the long positions are still very significant, and this bias should not be discounted, as there is clearly room for a correction after the significant move higher by USD/JPY.
The BOJ has been the focus of attention for USD/JPY traders and analysts, as the central bank introduced more easing last week and is now facing pressure to modify it stance on inflation. Also, new developments in the fiscal cliff crisis can 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
• 23:50 Japanese Corporate Services Prices Index. Estimate -0.6%.

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