USD/JPY – Yen Slump Continues after Fiscal Cliff Agreement

The Japanese yen continues to lose ground after Congress reached a deal on the fiscal cliff crisis on New Year’s Day. USD/JPY has crossed above the 87 line as the pair continues to push higher. Without an agreement on the fiscal cliff issue, tax hikes and spending cuts worth $650 billion would have automatically kicked in, and there were fears that this double-jab would push the US economy into recession. Although the deal is only temporary and does not deal with the budget ceiling or spending cuts, it does provide some short-term certainty, which is positive for market sentiment. The markets in the US are back in action after the New Year’s Day holiday, but Japanese markets are closed for a holiday on Wednesday and Thursday. Today’s highlight is US ISM Manufacturing PMI.

The markets cheered as US lawmakers hammered out an agreement on fiscal cliff, after grueling talks between the Republicans and Democrats. 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. The agreement permanently extends tax cuts for all earners up to $450,000 and retains other tax breaks for individuals and businesses. This was a hard-fought compromise measure, as Democrats wanted to extend the tax raises on those earning $250,000, while Republicans, unhappy with any tax increases, proposed preserving tax cuts for anyone earning less than $1 million.

Although the Senate and House of Representatives passed the deal by large margins, there was plenty of grumbling on both sides of the political divide. The deal appears to be the lowest-common denominator that Republicans and Democrats could agree on, and the agreement fails to deal with two critical issues – the debt ceiling and spending cuts. Both of these issues will have to be dealt with shortly. The debt ceiling will be reached in February, and the fiscal cliff agreement simply delays spending cuts until that time. With Republicans and Democrats far apart on these issues, we could see another fiscal cliff crisis erupt next month, and it’s anyone’s guess if the two sides will be able to reach common ground yet again.

In Japan, the new government 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. The incoming Prime Minister, Shinzo Abe, has called on the BOJ to double its inflation target to 2.0%, although the central bank has not responded as of yet. Japan released weak economic data last week, as 2012 ended on a disappointing note. Industrial Production and Consumer Spending figures were sluggish, 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 as early as January. The yen has responded to these developments by falling sharply against the US dollar, as USD/JPY trades at levels not seen since July 2010.

USD/JPY for Wednesday, January 2, 2012

USD/JPY Jan 2 at 11:15 GMT

87.11 H: 87.32 L: 86.54

USD/JPY Technical

USD/JPY continues to push higher, as the pair has broken through the 87 line. Late in the European session, the pair tested resistance at 87.36, although this line continues to hold firm for now. There is stronger resistance at 87.95. This line has not been breached since July 2010. On the downside, 0.8697 is the next line of support. This line could see further activity as the pair continues to fluctuate.
• Current range: 86.97 to 87.36
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 is showing some movement, with an increase in long positions. The ratio component is currently almost evenly split between short and long positions. This indicates that trader sentiment is evenly divided on the direction of the pair. If the yen continues to lose ground, we are likely to see the current trend continue towards long positions.
The fiscal cliff agreement in the US is the latest development to hurt the fading yen. With the BOJ expected to implement further monetary easing, we could see the greenback continue to pummel the yen, as the psychologically significant line of 90 is looking within reach.

USD/JPY Fundamentals
• 14:00 US Final Manufacturing PMI. Estimate 53.2 points.
• 15:00 US ISM Manufacturing PMI. Estimate 50.2 points.
• 15:00 US Construction Spending. Estimate 0.6%.
• 15:00 US ISM Manufacturing Prices. Estimate 51.4 points.
*Key releases are highlighted in bold
*All release times are GMT

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