USD/JPY – Yen Rallies, US CPI Report Next

The Japanese yen has posted slight gains on Friday, as USD/JPY has dropped below the 113 line in the European session. In economic news, Japanese All Industries Activity posted a second straight decline, with a weak reading of -0.9%. This was much worse than the estimate of -0.3%. In the US, the markets await key inflation reports, with the release of CPI and Core CPI. Traders should be prepared for possible volatility in the currency markets following these releases. 

The surging yen continues to shrug off Japanese fundamentals, which have been soft and are indicative of a limping economy, as underscored by Preliminary Japanese GDP  for the fourth quarter, which posted a decline of 0.4%. Japanese consumer spending has fallen off, hurting growth and raising the specter of deflation, which would be a nightmarish scenario for policymakers. Despite all the gloom and doom, the Japanese yen has not only held its own against the strong US dollar, but posted a superb rally. The secret to the yen’s recent success? The Japanese currency has maximized its traditional safe-haven status, as global financial instability has driven investors away from risk assets towards safer waters like the yen. However, the recent rush to safe assets will not last indefinitely, and weak fundamentals are not about to disappear. Given this backdrop, the BOJ may have to take further monetary action at its next policy meeting in March. At the January policy meeting, the BOJ adopted negative interest rates, shocking the markets and sending the yen sharply lower before the currency rebounded.

The Federal Reserve was in the spotlight earlier this week, with the release of the minutes of the January policy meeting. The statement after the meeting was cautious in tone, and the minutes reiterated the central bank’s concern that turmoil in global markets could have negative repercussions for the US economy. Policymakers sent out a broad hint that a rate hike is unlikely in March, as they discussed “altering their earlier views of the appropriate path for the target range for the federal funds rate”. This could have a negative impact on the US dollar, as investors may look elsewhere to park funds if US rates are not moving higher anytime soon. Federal Reserve chair Janet Yellen said last week that the Fed still planned to raise rates later in 2016, but FOMC member James Bullard argued that there was room to delay any rate moves, given global financial turmoil and weak US inflation. Still, a growing number of market players are skeptical that the Fed will make any moves before next year. Back in the heady days of December, the Fed hinted at a series of rate hikes during 2016, but the turmoil in the financial markets and the downturn in the US economy in 2016 has quickly dampened expectations of a rate move.

USD/JPY Fundamentals

Friday (Feb. 19)

• 8:00 US FOMC Loretta Mester Speaks
• 8:30 US CPI. Estimate -0.1%
• 8:30 US Core CPI. Estimate +0.2%

*Key releases are highlighted in bold

*All release times are EST

USD/JPY for Friday, February 19, 2016

USD/JPY February 19 at 6:50 EST

Open: 113.26 Low: 112.69 High: 113.29 Close: 112.82

USD/JPY Technical

• USD/JPY posted losses early in the Asian session and then leveled off. The pair continues to show marginal movement in European trade.
• 113.86 has switched to a resistance role following gains by the yen
• 112.48 is under pressure as a support line
• Current range: 112.48 to 113.86

Further levels in both directions:

• Below: 112.48, 111.50 and 109.87
• Above: 113,86, 114.65, 115.90 and 116.88

OANDA’s Open Positions Ratio

USD/JPY ratio is unchanged, consistent with the lack of movement we’re seeing from USD/JPY. Long positions retain a strong majority (59%). This is indicative of strong trader bias towards the pair moving to higher ground.

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.