Weekly Recap and Outlook for USDJPY - 7/19/2010

Written by ForexTraders.com on July 19, 2010 at 3:48 PM ET

USDJPY began the week on a solid note Monday trading off of its weekly high of 89.14 in the absence of any major economic releases for Japan. On Tuesday, Japanese Revised Industrial Production increased by 0.1% versus an expected decline of -0.1% while Japanese Household Confidence came out at 43.5 versus a reading of 42.2 expected. While the pair managed a higher close on Tuesday, the pair soon began declining as sentiment in the market turned risk averse.

On Wednesday, USDJPY declined sharply after the BOJ left the Overnight Call Rate unchanged at 0.10% as widely expected. After the rate release, the BOJ confirmed the bank's more favorable outlook for the Japanese economy stating that "Corporate profits and business sentiment have been improving, and business fixed investment is showing signs of picking up." On Thursday, the rate continued declining despite Japanese Tertiary Business Activity dropping -0.9% month on month versus a decline of -0.7% expected.

On Friday, USDJPY made its weekly low of 86.25 after news that the Democratic Party of Japan of DPJ was defeated in elections for the upper house of the Japanese Parliament. The DPJ is the party of newly appointed Prime Minister Naoto Kan. The DPJ, along with their smaller coalition partner, the People's New Party won only 109 seats in the upper house, 13 seats short of the 122 seats needed for a majority which may well lead to an expansion of the coalition. The rate then rallied somewhat on short covering before settling the week at 86.65, down 2.3%.

Fundamental Outlook for USDJPY

The primary market-moving economic data releases and policymaker speeches scheduled for this coming week in Japan and the United States are as follows:

Japan:

Economic data releases due out in Japan this coming week are rather thin, but do feature the BOJ Monetary Policy Meeting Minutes due out on Wednesday.

Monday starts the peaceful week on a quiet note with a Japanese Bank Holiday for Marine Day scheduled, while Tuesday has nothing significant due out.

Wednesday offers the weekly highlight as the BOJ's Monetary Policy Meeting Minutes are scheduled for release.

Thursday just has the All Industries Activity (-0.4% m/m) data due out to end the quiet week since Friday has nothing of note scheduled.

United States:

The upcoming week of economic data releases out in the United States calms down substantially but still offers some interesting policymaker speeches, as well as important data for forex traders on the U.S. housing market. In terms of economic data, the calendar features Tuesday's Building Permits and Thursday's Existing Home Sales releases.

The week commences on Monday with a speech by FOMC Member Duke scheduled in Virginia, as well as the release of the NAHB Housing Market Index (16).

Tuesday has the highlighted Building Permits (0.57M) data, as well as Housing Starts (0.58M) and testimony by FOMC Member Tarullo on Financial Regulation before the Senate Banking Committee scheduled in Washington, D.C.

Wednesday offers important testimony by Federal Reserve Chairman Ben Bernanke on the semi-annual monetary policy report before the Senate Banking Committee, in Washington, D.C.

Thursday is especially active with Initial Jobless Claims (453K), the highlighted Existing Home Sales (5.15M) data, the CB Leading Index (-0.3% m/m), the HPI (-0.3% m/m), plus more testimony by Fed Chairman Bernanke on the monetary policy report, this time before the House Financial Services Committee, in Washington, D.C.

Thursday ends the week since Friday has nothing notable due out.

The Technical Picture for USDJPY

On the technical front, USDJPY resumed its downward slide last week, making a fresh low at 86.25 as it closed down 2.3% for the week after failing to overcome selling pressure in the 89.09/14 region.

In doing so, the rate generally kept below its key 61.8% retracement level of the move from the 84.80 Nov 27th low up to the 94.97 May 5th high at 88.68. Sustained losses below this level would suggest that another objective for the rate would be at the 100% retracement level at 84.80 which could offer significant support.

Furthermore, the recent breakout of a presumed triangle pattern continues to provide an as yet unmet measured move objective of 83.81, so further downside may well be seen this coming week that could test the key 84.80 support level.

USDJPY also continues to trade well below its 200-day Moving Average that has now started to slope downwards again after having pretty much flattened out and so provides a bearish medium term outlook for the rate. This key indicator now comes in at the 90.71 level.

Nevertheless, while it may still have some way to fall, USDJPY's most recent downward move seems to be approaching support on the overall declining wedge seen on the graph for the 14-day RSI, as well as its lower Bollinger Band now at 86.42. Also, while the most recent 86.25 low penetrated into oversold territory on this RSI, it did so to a lesser degree than the previous lows, thereby demonstrating divergence in extreme territory that can often portend a market reversal.

After closing at 86.65 on Friday, resistance for USDJPY shows at 86.96/87.01, 89.09/14 and 90.18, just above the psychological 90.00 level. Support is indicated at 86.25, 85.86 and 84.80.

Overall, this technical scenario indicates that traders with shorts could now start looking to cover at lower levels ahead of good support at 84.80, although a break there could well send the rate significantly lower.

Figure 1: Daily candlestick chart of USDJPY showing its 200-day MA in red, Bollinger Bands in green, Trend Lines in purple and the 14-day RSI in the indicator box in pale blue.