USDJPY saw volatile trading last week, initially starting the week off on a firm note by making its weekly high of 85.69 on Monday. The pair then began trading lower after Prime Minister Naoto Kan and BOJ Governor Shirakawa had a phone discussion about recent forex market developments and "economic conditions at home and abroad". This prompted the nervous market to think that the BOJ may not be taking immediate market action to reverse or slow the recent strength in the Japanese Yen.

Tuesday saw the rate trade to its weekly low of 83.57 that represents a fresh 15-year low for the rate after the Japanese Trade Balance came out showing a surplus of 0.61T that was considerably better than the expected 0.47T. Also, the previous number saw a slight upward revision from 0.46T to 0.51T. Yoshihiko Noda, the Japanese Finance Minister, also held a meeting with Prime Minister Kan and commented that Japanese authorities would, "have to take appropriate action when necessary" to counteract the stronger Yen levels.

This finally did the trick, so USDJPY then politely reversed and began trading higher on Wednesday in spite of the release of weak U.S. housing market data and despite a lack of economic data from Japan. The pair then consolidated on Thursday as the Kansas City Fed's Jackson Hole Symposium began that had BOJ Governor Shirakawa and other high level Japanese finance officials attending.

Also on Thursday, Japanese Household Spending showed an increase of only 1.1% for the year against an expected rise of 1.5%. Also, Tokyo Core CPI fell by -1.1% for the year, a number that was just slightly above the market consensus of a -1.2% drop. In addition, Japanese National Core CPI dropped by 1.1% for the year, in line with the market's expectations. Thursday also saw the release of the Japanese Unemployment Rate that contracted to 5.2% and came out a bit better than the 5.3% that had been expected.

Friday saw the Greenback rebound strongly versus the Yen after a slightly better than expected U.S. GDP number came out. Also weakening the Yen were comments from Prime Minister Kan that, "volatile movements in the currency market have a negative impact on economic and financial stability." USD/JPY then proceeded to close the week at 85.33, showing just a modest drop of 0.3% for the week.

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:

The upcoming economic data calendar in Japan is similar to last week in terms of activity, and offers some important numbers for the forex market to ponder. Data releases scheduled feature the important Japanese Retail Sales data due out on Tuesday.

Monday is quiet, so Tuesday starts the week off with the release of the highlighted Japanese Retail Sales (3.1% y/y).

Also out on Tuesday are Manufacturing PMI (last 52.8), Preliminary Industrial Production (-0.3% m/m), Average Cash Earnings (0.9% y/y) and Housing Starts (2.5% y/y).

Wednesday has nothing of note scheduled for release, but Thursday has the Japanese Monetary Base (6.3% y/y).

Friday ends the week with Capital Spending (-6.6% q/y).

United States:

The upcoming week of economic data releases out in the United States heats up substantially and once again offers some interesting data for forex traders on the U.S. economy. The U.S. economic calendar features key employment data that includes Non Farm Payrolls and the U.S. Unemployment Rate that are both due out on Friday.

Monday starts the active week off with the release of Core PCE Price Index (0.1% m/m), Personal Spending (0.4% m/m) and Personal Income (0.3% m/m). In addition, a speech by FOMC Member Bullard is scheduled in St. Louis.

Tuesday has the S&P/CS Composite-20 HPI (3.7% y/y), the Chicago PMI (57.5), the CB Consumer Confidence survey (50.9), as well as the important FOMC Meeting Minutes.

Wednesday offers Challenger Job Cuts (last -57.2% y/y) and the important ADP Non-Farm Employment Change (20K) that might provide a clue to Friday's major numbers. In addition, Wednesday has scheduled ISM Manufacturing PMI (53.3), ISM Manufacturing Prices (55.8), Construction Spending (-0.4% m/m) and Total Vehicle Sales (11.6M).

Thursday features has the important weekly Initial Jobless Claims (477K), as well as Revised Nonfarm Productivity (-1.9% q/q), Revised Unit Labor Costs (1.4% q/q), Pending Home Sales (-1.5% m/m) and Factory Orders (0.5% m/m).

Friday will provide the weekly highlight since it features the key Non Farm Payrolls data (-101K) and the U.S. Unemployment Rate (9.6%). Also due out on Friday are ISM Non-Manufacturing PMI (53.6) and Average Hourly Earnings (0.1% m/m).

The Technical Picture for USDJPY

On the technical front, USDJPY saw a sharp sell off last Tuesday that sent the rate to a new fifteen year low at the 83.57 level. After that blowout, USDJPY then traded correctively higher throughout the rest of the week, and eventually peaked at 85.43 on Friday before closing down slightly at 85.33, falling an overall 0.3% on the week.

If the current corrective rally continues, USDJPY should meet resistance at a falling trend line that can now be drawn at 86.90. Furthermore, the recent breakout of a presumed triangle pattern has now met its measured move objective of 83.81 in the recent decline to the 83.57 level. Now that the 84.80 support has given way, the prevailing down trend could well send the rate much lower, with 79.75 being the next major support level showing on the chart for USDJPY.

The rate also continues to trade well below its 200-day Moving Average that has now started to slope gradually downwards again after having pretty much flattened out. This key indicator now comes in at the 90.03 level and provides an increasingly bearish medium term outlook for the rate.

Furthermore, the recent low in USDJPY at 83.57 was accompanied by a fresh low in the 14-day RSI that almost penetrated into oversold territory. After the subsequent corrective rally that took the indicator right up to its upper declining trend line, the key indicator currently comes in the lower part of neutral territory at 41. This level should not impede further downside action much in the coming week, if at all.

After closing at 85.33 on Friday, resistance for USDJPY shows up in the 85.43/90 region, at 86.35, and in the 86.96/87.01 region. Initial strong support is seen in the 84.71/88 region, and below that at 84.25, at 83.57, and at the major 79.75 support level.

Overall, this technical scenario for USDJPY argues for continuing to trade the rate on the short side - both from a medium term and short term basis - although, since the rate is currently at historically low levels, traders doing so should watch out for possible sharp upward moves. Furthermore, medium term traders holding shorts could now start looking for dips to cover on near current levels, especially if additional regular RSI/Price divergence is seen on any new lows.

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.