USD/JPY – Yen Halts Steep Dive

The Japanese yen recovered slightly from its recent slide, which intensified following the fiscal cliff agreement on Tuesday. USD/JPY dipped back below the 87 line, but the pair continues to hover around this level. Japanese markets remain closed for holidays, but the US markets are in full swing, with two key employment releases on Thursday – Non-Farm Employment Change and Unemployment Claims. The other highlight is the minutes from the FOMC’s most recent policy meeting.

With the US about to topple over the fiscal cliff, Congress pulled out all the stops and managed to cobble together a last minute agreement to avert the crisis. Without a deal, there was a danger that the US economy would slip into recession into 2013, due to a combination of tax increases and spending cuts. The agreement permanently extends tax cuts for all earners up to $450,000 and retains other tax breaks for individuals and businesses.

Although both the Senate and House of Representatives passed the deal by large margins, although there was plenty of grumbling on both sides of the political divide- perhaps proof that the deal reached was a true compromise. Most notably, the agreement fails to deal with two critical issues – the debt ceiling and spending cuts. The debt ceiling will be reached in February, and action will have to be taken to avoid a default on the country’s debt. Republicans, who were unhappy that the fiscal cliff agreement did not address spending cuts, are expected to demand cuts in programs such as Medicare and Social Security.

They will face stiff resistance from the Democrats, who vehemently oppose any reductions in these programs, and favor raising the debt ceiling, which is what Congress agreed to in 2011. President Obama has stated he will not negotiate over the debt ceiling, but some kind of agreement will likely be reached between the two sides. The IMF has also weighed in on the matter, saying that the fiscal agreement is not enough, and that the US must take further action to deal with its long-term debt problem. The IMF call for Congress to quickly approve a comprehensive plan which to “ensure both higher revenues and containment of entitlement spending over the medium term”.

As we begin 2013, a look at recent key US releases points to a mixed and confusing picture. Employment numbers improved in December, and the markets will be hoping for a repeat from Thursday’s economic releases. However, consumer confidence fell badly last month, indicating that consumers still lack confidence in the economic recovery and are wary to open up their wallets. US Housing figures were mixed as well, with New Home Sales down but Pending Home Sales up sharply. Although there are signs that the US economy is improving, this zigzagging makes it difficult to predict what to expect in early 2013.

In Japan, the new Prime Minister, Shinzo Abe, 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.

Recent economic data has been weak, 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 later this month. The yen has responded to these developments by falling sharply against the US dollar, as USD/JPY continues to trade at levels not seen since July 2010.

USD/JPY for Thursday, January 3, 2012

USD/JPY Jan 3 at 13:50 GMT

86.91 H: 87.09 L: 86.85

USD/JPY Technical

USD/JPY has leveled off from its strong upward move, as the pair has dipped below the 87 level. The resistance line of 86.97 continues to face pressure from the pair, and this could continue into the North American session. There is stronger resistance at 87.36. This line was tested as the yen slumped, but managed to stay intact. On the downside, 0.8637 is the next line of support, followed by the round number of 86.
• Current range: 86.37 to 87.97
Further levels in both directions:
• Below: 86.37, 86, 85.62, 85.15, 84.75, 84.14 and 83.44.
• Above: 86.97, 87.36, 87.95, 88.55 and 89.31.

OANDA’s Open Position Ratios
With the yen continuing to slump, the USD/JPY ratio showed some movement, with an increase in short positions. The ratio component is currently slightly in favor of the short position component. Trader sentiment remains almost evenly divided, as the pair continues to exhibit strong fluctuation.
USD/JPY finally leveled off after its recent sharp climb. Is this an overdue correction, or simply a short pause before the dollar makes more gains? The 87 line remains under pressure, and we could see the pair bounce back and cross this important level.
USD/JPY Fundamentals
• 12:30 US Challenger Job Cuts.
• 13:15 US ADP Non-Farm Employment Change. Exp. 134K.
• 13:30 US Unemployment Claims. Exp. 356K.
• 19:00 US FOMC Meeting Minutes.
• All Day: US Total Vehicle Sales. Exp. 15.3M.
*Key releases are highlighted in bold
*All release times are GMT

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