The Japanese yen has posted strong gains against the US dollar in Tuesday trading. USD/JPY has dropped around 200 points, and is trading in the high-96 range in the European session. The yen was the big winner as the BOJ failed to address the volatility in the government bond markets, which resulted in more losses on the Nikkei. In economic news, Japanese BSI Manufacturing Index jumped to its highest level since September 2011. The BOJ released a monetary policy statement, which indicated that the central bank is continuing its monetary policy. In the US, there are two minor releases today – NFIB Small Business Index and Wholesale Inventories.
Japanese releases started the week on a positive note, as two major events beat expectations. Current Account posted a respectable surplus of JPY 0.85 trillion, easily surpassing the estimate of JPY 0.39 trillion. Final GDP gained 1.0%, edging past the estimate of 0.9%. There was more good news on Tuesday, as the BSI Manufacturing Index, an important manufacturing release, jumped to 5.0 points. The markets had expected a much weaker reading of -2.1 points. These readings are good news for the Japanese government, which needs to be able to point to some tangible results from its economic platform, other than a plunging currency.
Meanwhile, the BOJ released a monetary policy statement, and the tone was optimistic. The BOJ said the Japanese economy was picking up speed, and that it would continue to maintain current monetary policy. Underscoring this point, the central bank voted unanimously to maintain its pledge of increasing cash and deposits in the BOJ by 60- 70 trillion yen annually. However, equities dropped as the markets were disappointed that no measures were announced to deal with volatility in the bond market. The yen benefited as nervous investors sought the safety of the Japanese currency.
Taking a look at the US, there was some good news from the S&P ratings agency on Monday, as the well-respected firm revised the US sovereign credit rating from negative to stable. This is an important vote of confidence in the US economy, and means that there is less than a 1 in 3 chance of another downgrade in the next two years. S&P noted that a key factor in its revision was the agreement reached in the US Congress which averted the fiscal cliff crisis, which would have led to $600 billion in automatic tax increases and spending cuts and could have pushed the fragile US economy into recession. In 2011, S&P cut the US credit rating from AAA to AA, and the threat of another downgrade has been a concern of the markets. This news will likely improve market sentiment and could give a boost to the US dollar.
Will the Fed pull the trigger on QE? A lot will depend on US employment numbers, which were a mix of good and less good last week. ADP Non-Farm Payrolls slipped badly, as the key employment indicator missed the estimate for the third consecutive month. The indicator posted a reading of 135 thousand, well off the forecast of 171 thousand. Unemployment Claims managed to meet the estimate, but the market reaction was lukewarm. Non-Farm Payrolls was strong, climbing from 165 thousand to 175 thousand. This was above the market forecast of 167 thousand. However, the Unemployment Rate rose edged higher to 7.6%, above the forecast of 7.5%. With speculation growing that the Fed could scale back QE in the next few months, employment figures have taken on added significance. However, the Fed may decide to hold a steady course if the employment picture remains cloudy.
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USD/JPY June 11 at 11:00 GMT
USD/JPY 96.94 H: 98.98 L: 96.47
USD/JPY has registered sharp losses on Tuesday, as the pair trades in the high-96 range. There is support at 96.03, which is protecting the 96 level. This is followed by support at 94.91. On the upside, the pair is facing resistance at 97.18. This line could face pressure if the US dollar can bounce back from today’s sharp drop. This is followed by resistance at 98.94, just shy of the round number of 99.
- Current range: 96.03 to 97.18
Further levels in both directions:
- Below: 96.03, 94.91, 94.02 and 92.73
- Above: 97.18, 98.94, 99.57, 100.00 and 100.66
USD/JPY ratio is unchanged on Tuesday, despite the sharp gains posted by the yen against the dollar. If the pair continues to show strong movement, we can expect an increase in activity from the ratio.
The yen surged following a statement from the BOJ, which disappointed the markets and sent equities lower. We could see the pair settle down during the day, as there are no major releases until Thursday.
USD/JPY Fundamentals
- 2:48 Bank of Japan Monetary Policy Statement
- 6:04 Japanese Preliminary Machine Tool Orders. Actual -7.4%
- 7:37 Bank of Japan Press Conference
- 11:30 US NFIB Small Business Index. Estimate 93.4 points.
- 14:00 US Wholesale Inventories. Estimate 0.1%.
- 23:50 Japanese Core Machinery Orders. Estimate -8.3%
- 23:50 Japanese CGPI. Estimate 0.7%
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