Key Points:
- Increasing stimulus rhetoric.
- Downside risks dominate.
- USD/JPY outlook remains bearish.
The USD/JPY had a strong week as the pair continued to bounce from the key 100.00 handle with the help of some stronger US economic data and continued speculation of additional Japanese QE. Given increasing rhetoric around stimulus from the Bank of Japan it is therefore salient to take a look at what happened last week and what events could possibly appear in the week ahead.
Last week proved highly positive for the pair as markets reacted sharply to mounting speculation that the Abe government would reintroduce some form of helicopter money. However, this is yet to eventuate but certainly didn’t stop the greenback from appreciating strongly against the Yen, with some help from a resurgent US Retail Sales result. In addition, the Japanese Final Industrial Production figures also proved disappointing at -2.6%. Subsequently, the USD/JPY finished the week well up around the 104.72 mark.
The week ahead is fairly quiet on the Japanese fundamental economic front with just the Manufacturing PMI and Machine Tool Orders results due out. However, there are a slew of US releases which are likely to impact the pair sharply with a focus on the US Philly Fed Manufacturing Index. Subsequently, keep a close watch on Thursday’s range of US economic data as it could provide plenty of surprises.
Additionally, it is likely that we will see some further rhetoric on options for easing from both the central bank and the Japanese Government. In fact, the Japanese Chief Cabinet Secretary has just weighed into the debate and stated that the bank has a range of options for easing but that they have no plans to issue deficit bonds as part of any stimulus package. Subsequently, it’s relatively clear that high level talks over the direction of the Japanese economy are occurring and it therefore would be no surprise if the Bank of Japan takes decisive Keynesian action in the weeks ahead.
From a technical perspective, the pair has managed to pullback from just below the key 100.00 handle which has largely eased the pressure on RSI’s oversold status. In addition, the 12 EMA has started trending strongly towards the 30 and 100 EMA’s but price action is likely to be capped by a cluster of resistance around the 106.78 mark. Subsequently, our bias remains bearish for the pair given the level of strong resistance just above price actions current position, which also coincides with the bearish trend line. Therefore, it is likely that the downtrend will recommence sometime in the latter part of the coming week. Support is currently in place for the pair at 103.54, 99.95, and 98.98. Resistance exists on the upside at 106.78, 110.16, and 111.86.
Ultimately, capital markets are likely to take their cue from the Bank of Japan but whichever way you look at it, fundamental or technical, the Yen is likely to weaken significantly in the weeks ahead.