USD/JPY – Yen Weakness Continues after Weak Japanese Data

The Japanese yen continues to trade above the 86 level, as the markets brace for the US to go over the fiscal cliff on January 1. Despite intensive talks in Washington to try and avert the fiscal cliff, the likelihood of a last minute breakthrough on Capitol Hill before the January1 deadline does not appear likely. US Market releases ended the year on a high note, as Pending Home Sales jumped 1.7%, well above the forecast of a 0.3% decline. With the markets closed in Japan on Monday and in the US on Tuesday, trading volumes remain thin. This has reduced liquidity and could result in increased volatility as we wind up 2012. There are no scheduled releases out of Japan or the US on Monday.

In the US, the deadlock over fiscal cliff continues, despite a rare Sunday session of both the Senate and the House of Representatives. Despite the flurry of activity on Capitol Hill, there is still no progress to report in the fiscal cliff talks between the Republicans and the Democrats. Both sides remain far apart on the issues of tax increases and cuts to federal programs, with the Republicans reluctant to introduce any tax hikes and the Democrats against spending cuts in federal programs. The Republicans have blocked proposals to raise taxes on earners with incomes above $250,000, and the Democrats are dead set against any cuts to the Medicaid or Social Security programs. Unless a dramatic breakthrough is announced on Monday, the US will go over the fiscal cliff, meaning that 600 billion dollars in tax hikes and spending cuts will come into effect on January 1st. This double-jab could rock the fragile US economy and stifle the nascent economic recovery. Lawmakers on both sides have asked US vice-president Joe Biden to lend a hand and try to break the impasse. Senate Majority Leader Harry Reid said he is “hopeful but realistic”, but it's doubtful if the markets are sharing his sentiment, with only hours left to reach an agreement to avert fiscal cliff.

In Japan, the new government continues to put pressure on the Bank of Japan to adopt further monetary easing measures. The world's third-largest economy is mired in recession, and the government is taking wants to aggressively tackle deflation in order to kick-start the stagnant economy. The New Prime Minister, Shinzo Abe, has called on the BOJ to double its inflation target to 2.0%, although the central bank has not responded as of yet. Japan released weak economic data last week, as 2012 will end on a disappointing note. Industrial Production and Consumer Spending figures were sluggish, and the government is expected to point to these disappointing numbers as it presses ahead with its new economic platform. These weak figures are putting even more pressure on the BOJ to respond with more easing measures, something we could see as early as January. The yen has responded to these developments by falling sharply against the US dollar, and we could see this trend continue into 2013.
USD/JPY for Monday, Dec 31, 2012

86.098 H: 86.17 L: 85.97

USD/JPY Technical

S3 S2 S1 R1 R2 R3
85.15 85.62 86 86.37 86.97 87.36

USD/JPY continues to trade at high levels in thin trading as we wrap up 2012. Both proximate support and resistance levels remain in place (S1 and R1), although the support line at the round number of 86 remains under pressure. This psychologically significant line has been active over the past several days, and this trend could continue this week as well. There is stronger resistance at 86.37. On the downside, there is strong support at 85.62.
• Current range: 86 to 86.37
Further levels in both directions:
• Below: 86, 85.62, 85.15, 84.75, 84.14, 83.44, 83.12 and 82.37
• Above: 86.37, 86.97, 87.36, 87.95 and 88.55.

OANDA's Open Position Ratios
With thin trading continuing as the year winds down, the USD/JPY ratio remains steady, with a slight bias towards short positions. This indicates that trader sentiment is split on the direction of the pair. If the yen continues to lose ground, we will likely see the ratio show some change as long positions continue to be filled.
There is more room for the pair's upward trend to continue, as the new Prime Minister, Shinzo Abe, aggressively pursues economic measures which will put more pressure on the yen. With thin trading and low liquidity, the pair could show some volatility, especially as the clock ticks down on the fiscal cliff crisis. Any positive developments would likely be dollar negative, while pessimistic news will sour market sentiment and push investors to seek the safety of the US dollar.

USD/JPY Fundamentals
• There are no scheduled releases out of Japan or the US or Monday.

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