USD/JPY – Yen Weakens as Japan Purchases ESM Bonds

USD/JPY climbed higher in early Asian trading, as the pair reacted to Tuesday's announcement that the Japanese government would purchase bonds from the European Stability Mechanism (ESM). The Japanese government said that the move would increase stability in the Eurozone and help stabilize the yen. It is another quiet day regarding fundamental news. There are no Japanese releases today, and only two US releases – Crude Oil Inventories and the 10-year Bond Auction.

On Tuesday, Japanese Finance Minister Taro Aso stated on Tuesday that Japan plans to purchase bonds from the European Stability Mechanism, which is the Eurozone's bailout fund. He did not specify the amount of bonds in question. The first debt auction will be for three-month notes, with a value of about 2 billion euros. This will be the first time that the ESM has issued securities since it was formed last October. Finance Minister Aso said that the move will help bring more stability to the Eurozone, which in turn will also help stabilize the yen and other currencies. Japan has already purchased about 7 billion euros from the European Financial Stability Facility (EFSF).

The EFSF was replaced in October with the ESM, but both bailout funds will continue to function until the EFSF is phased out in mid-2013. Clearly, the Japanese government's primary motivation in purchasing bonds from the ESM is not to save the Euro-zone. The purchase of the bonds, which will be made with Japanese yen, will allow Prime Minister Shinzo Abe to continue to weaken the Japanese currency (and strengthen the euro at the same time) without sustaining further criticism from the US and other countries, who are worried about the aggressive economic stance of the new government and its call for unlimited easing by the Bank of Japan. There is unease in the currency markets at the fact that the Japanese currency has declined about 8 per cent against the US dollar since mid-November. The new Japanese government, which won the elections in December, is determined to stamp out deflation, which has been a long-term problem for the sluggish Japanese economy.

The markets breathed easier as we started the new year, with the fiscal cliff agreement that was hammered out in the US Congress. However, any celebrating would be premature, as it appears that this was just the first round of more bruising battles ahead. The hard-fought agreement, which was preceded by months of acrimony and bad blood between the Republicans and Democrats, was criticized by many analysts and economists as a deal comprised of the lowest common denominator which both sides could reluctantly compromise and agree upon. However, the agreement left two critical issues for another day – the debt ceiling and spending cuts. The problem is, the clock on those issues is also winding down, as the debt ceiling will be reached in February, and action will have to be taken to avoid a default on the country's debt. Otherwise, the real possibility of a US default will likely cause turmoil in the markets.

Taking a look at fundamentals, there are no Japanese releases on Wednesday, but the markets will be keeping close tabs on Thursday's publication of Current Account, a key release. The markets are expecting that the monthly indicator will point to a smaller surplus.

USD/JPY for Wednesday, January 9, 2013

USD/JPY Jan 9 at 11:35 GMT

87.56 H: 87.73 L: 86.90

USD/JPY Technical

USD/JPY pushed above the 87 level in the Asian session, and has consolidated in the mid-87 range. There is weak support at 87.36, and this line could see further activity if the pair shows any downward movement. On the upside, 87.95 continues to provide resistance, although it is not a strong line. This is followed by resistance at 88.55.

• Current range: 87.36 to 87.95.

Further levels in both directions:
• Below: 87.36, 86.97, 86.37, 86, 85.62 and 85.15.
• Above: 87.95, 88.55, 89.31, 89.85, 90.23 and 90.91.

OANDA's Open Position Ratios

The USD/JPY ratio has corrected slightly, with a small move back towards long positions. Trader sentiment is almost evenly split, with no clear bias as to what direction the pair will take. We will likely have to wait for some fluctuation from the pair before the ratio shows some further movement.

The pair continues to fluctuate, and is having difficulty finding its footing. Following some upward movement by USD/JPY in early Tuesday trading, the pair has leveled off in the mid-87 range. With only a two releases on Tuesday, it could shape up to be an uneventful day.

USD/JPY Fundamentals

• 15:30 US Crude Oil Inventories. Estimate 0.9M
• 18:00 US 10-year Bond Auction

*Key releases are highlighted in bold
*All release times are GMT

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