USD/JPY – Yen Soars as Federal Reserve Split over QE

The US  dollar was broadly lower on Wednesday, and the Japanese yen took full advantage. USD/JPY dropped over 200 points, closing at the 99 level. On Thursday, the dollar has edged higher. The dollar tumbled after the minutes from the most recent Federal Reserve policy meeting indicated that the Fed might hold back on tapering QE. In economic news, US 10-year bonds jumped to their highest level in two years, with an average yield of 2.67%. US Unemployment Claims looked weak, hitting an eight-week high. In Japan, the BOJ wrapped up a two day policy meeting, and as expected, made no changes to its monetary policy. Japanese Core Machinery Orders looked excellent, easily beating the estimate.

This week’s Japanese releases continue to look good, for the most part. Tertiary Industry Activity climbed to 1.2%, its best performance since February. The estimate stood at 0.9%. There was more good news from the Corporate Goods Price Index, which jumped from 0.6% to 1.2%, matching the forecast. This is the inflation index’s sharpest rise since January 2012, and points to inflation in the economy. One of the foremost aims of the country’s monetary policy has been to stamp out deflation, so the CGPI reading is certainly welcome news. The Consumer Confidence release was not as sharp, falling from 45.7 points to 45.3, well off the estimate of 44.3.  There was more good news on Wednesday, as Core Machinery Orders, an important manufacturing release, jumped 10.5% in June, crushing the estimate of 1.9%.                                         

At the end of a policy meeting, the Bank of Japan sounded cautiously optimistic about the economy, and reiterated that it would use quantitative and qualitative monetary easing to achieve an inflation level of 2% .The BOJ did not adjust its aggressive monetary policy, which it started back in April. At that time, the BOJ said it planned to pump JPY 130 trillion into the economy within two years, and committed to doubling the monetary base to JPY 270 trillion by the end of 2014. These measures have sent the yen tumbling to multi-year lows, but the economy has been slow to respond to the monetary shock therapy. Lately, however, economic indicators have shown improvement, including inflation indicators, which have pointed upwards.

On Wednesday the dollar took a hit courtesy of the Federal Reserve, and was broadly weaker against the major currencies as a result. The minutes indicated that Federal Reserve policymakers remain deeply divided over when to scale down the current round of QE, whereby the Fed purchases $85 billion in assets each month. About half of the Fed policymakers favor scaling down QE before the end of 2013, while others feel that the employment market is still too fragile for the Federal Reserve to take any action. The dollar continued to lose ground as Federal Reserve chair Bernanke gave a speech in which he said that the Fed would maintain a loose monetary policy for the foreseeable future, due to low levels of inflation and a high US unemployment rate. On Thursday, US Unemployment Claims looked weak, coming in at 360 thousand. This was well above the estimate of 342 thousand, and was the highest level since mid-May. Given the turbulence in the markets over whether the Federal Reserve will scale down QE, US employment releases will remain under the market microscope, as stronger employment data could result in the Fed taking action and tapering QE.

USD/JPY for Thursday, July 11, 2013

USD/JPY 99.17 H: 99.62 L: 98.28

USD/JPY Technical

USD/JPY has dropped sharply and is trading in the low-99 range. The pair dropped as low as 98.28 in the Asian session, but was unable to maintain this downward momentum and pulled back above the 99 line. USD/JPY is facing resistance at 99.57. This is a weak line, and could be tested if the dollar can reverse directions. The critical 100 line, which has been busy in July, is back in a resistance role. Given the volatility we are seeing from the pair, this important line cannot be considered safe. On the downside, the pair is receiving support at 98.43. This is followed by a support level at 97.83, which was last tested in late June.

Current range: 98.43 to 99.57

Further levels in both directions:

• Below: 98.43, 97.83, 97.18 and 0.9620
• Above: 99.57, 100, 100.85, 101.66, 102.52 and 103.30

OANDA’s Open Positions Ratio

USD/JPY ratio continues to point to movement towards short positions in Thursday trading. This is consistent with the pair’s current movement, as the yen continues to show slight gains in the Thursday North American session. Long positions continue to dominate the open positions, indicating that trader sentiment is biased in favor of the dollar recovering and moving upwards.

The yen took advantage of broad dollar weakness on Wednesday, and is back below the 100 level. Will the yen continue to improve? The US releases key inflation and consumer confidence numbers on Friday, so we could see further volatility before the week is out.

USD/JPY Fundamentals

• 2:48 BOJ Monetary Policy Statement. 
• 7:38 BOJ Press Conference.
• 12:30 US Unemployment Claims. Exp. 342K.  Actual 360K.
• 12:30 US Import Prices. Estimate 0.1%. Actual -0.2%.
• 14:30 US Natural Gas Storage. Estimate 80B.
• 15:00 US FOMC Member Daniel Tarullo Speaks.
• 17:00 US 30-year Bond Auction.
• 18:00 US Federal Budget Balance. Estimate 42.1 billion.

*Key releases are highlighted in bold

*All release times are GMT

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.