Last week's trading saw USDJPY give back a portion of its gains made the previous week in the wake of the Bank of Japan's most recent round of official intervention. The rate started the notably peaceful week out by opening on a firm note and trading to its weekly high point of 85.79 on Monday as Japanese markets closed down to observe the country's "Respect for the Aged" Bank Holiday. Nevertheless, the rate soon began trading softer and Tuesday's session saw the rate slide even further as the Greenback softened after the Federal Reserve Bank announced that it would be maintaining its benchmark Fed Funds rate steady at the 0.25% level. While the rate decision was as expected, the forex market reacted strongly to the dovish comments contained in the accompanying FOMC statement which increased the market's expectations for future quantitative easing from the Fed in its attempts to help stimulate the sluggish U.S. economy, that are now being nicknamed QE II by the market. The market focused in on the FOMC's comment that the Fed was, "prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate". This fresh hint at the possibility of further Fed easing put additional downside pressure on the already soft USDJPY rate. In terms of U.S. economic data released last Tuesday, Building Permits were out in line with market expectations at 0.57 Million, while Housing Starts bettered the 0.55 Million consensus by coming out at 0.60 Million.

Wednesday also saw the USDJPY rate continue its sharp fall, with little overall impact seen from the release of the Japanese All Industries Activity index that gained by +1.0% for the month compared with the slightly higher anticipated +1.1% increase, especially since the former number saw an offsetting upward revision to +0.2% from +0.1%. On Thursday, USDJPY continued falling despite the absence of economic data coming out from Japan, and traders noted no signs of additional official intervention by the BOJ. Friday's session saw USDJPY stage a sharp rally driven by short covering based on an as yet unconfirmed report from the Japanese Kyodo news service that the BOJ had again intervened in the forex market. The rate eventually traded up to reach the 85.38 level before USDJPY started erasing most of its gains as the market showed increasingly skepticism about the report since the Bank of Japan failed to confirm it. The rate made its weekly low point at the 84.11 level before managing to recover somewhat to close the week a bit above that at the 84.26 level, showing a net drop of -1.8% compared with the previous weekly close.

Also, in a talk given this past Sunday at a forum hosted by the Japan Society of Monetary Economics in Kobe, Bank of Japan Governor Shirakawa commented that, "We are ready to implement appropriate action in a timely manner if judged necessary". Shirakawa went on to state that, "We are watching how the yen's current gain affects the Japanese economy," and he also added that, "We have to pay more attention than before to downside risk to the economy." The forex market will now await this coming week's significant calendar of economic data releases due out from Japan for further direction, although it still remains somewhat shy of further intervention by the Bank of Japan that might result from increasing strength in the Yen.

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 coming week of economic data releases due out in Japan warms up considerably when compared with the last few weeks of relative peace. The calendar will feature the key Tankan Report's Manufacturing and Non-Manufacturing Indexes that are due out Wednesday. The active week begins a day earlier than normal with two speeches by BOJ Governor Shirakawa scheduled in Kobe on Sunday.

Monday will then offer the Japanese Trade Balance (0.52T) and the CSPI (-1.2% y/y), in addition to another speech by BOJ Governor Shirakawa that will be held in Osaka.

Tuesday has nothing notable scheduled for release, but Wednesday will offer the release of the highlighted Tankan Report with the Tankan Manufacturing Index (7) and the Tankan Non-Manufacturing Index (-2) being closely watched indicators.

Thursday then has a busy schedule, with Japanese Retail Sales (4.6% y/y), Housing Starts (10.3% y/y), Manufacturing PMI (last 50.1) and Preliminary Industrial Production (1.2% m/m) all due for release.

Friday closes down the unusually active data week in Japan with the scheduled release of Tokyo Core CPI (-1.0% y/y), National Core CPI (-1.0% y/y), Household Spending (1.4% y/y) and the Japanese Unemployment Rate (5.1%).

United States:

The coming economic data calendar for the United States warms up significantly compared with last week's, and it features the release of important information on the U.S. economy that will include Tuesday's release of the Consumer Confidence index by the Conference Board.

Monday has nothing due out, so Tuesday will start the busy week out with the release of the highlighted CB Consumer Confidence index (52.5), in addition to the Richmond Manufacturing Index (6) and the S&P/CS Composite-20 HPI (3.1% y/y).

Wednesday just has Crude Oil Inventories (last 1.0M) due out, plus a speech by FOMC Member Rosengren scheduled in New York.

Thursday looks particularly active and features the release of Final GDP (1.6% q/q), Weekly Initial Jobless Claims (457K), the Final GDP Price Index (1.9% q/q) and the Chicago PMI survey (56.0). Also on Thursday, Federal Reserve Bank Chair Ben Bernanke will be making important testimony about implementing the Dodd-Frank Act before the U.S. Senate's Banking, Housing and Urban Affairs Committee in Washington D.C. Bernanke will also speak at a Washington town hall meeting that same day.

Friday will then conclude the active week with its very busy economic calendar that includes the release of the Core PCE Price Index (0.1% m/m), Personal Income (0.3% m/m), Personal Spending (0.4% m/m), the Revised University of Michigan Consumer Sentiment survey (67.1) and the Revised University of Michigan Inflation Expectations (last 2.2%), ISM Manufacturing Prices (59.3) and the ISM Manufacturing PMI (54.6), Total Vehicle Sales (11.6M), Construction Spending (-0.4% m/m) and a speech in New York to be given by FOMC Member Dudley.

The Technical Picture for USDJPY

On the technical front, USDJPY last week retraced almost 61.8% of its BOJ intervention induced upside spike to 85.92 seen the previous week, with the rate coming off as low as 84.26 before shooting higher again on Friday to 85.38 - just below a key declining trend line then drawn at 85.41. The subsequent selloff brought USDJPY as low as 84.11 before it bounced slightly into the weekly close at 84.26, showing a net drop of -1.8% compared with the previous weekly close.

Furthermore, the rate's 14 day RSI has broken its triangular consolidation pattern to the upside, although it has returned to the lower central part of neutral territory. The key indicator now comes in at the 44 level and should not present a significant impediment to a move in either direction.

Also, the rate seems to be finding support near the central moving average line of its Bollinger Bands that is currently at 84.46 and meeting resistance at the prevailing downward trend line that is now drawn at 85.34 and has contained both recent upward spikes in the rate.

Now that the rate has managed to trade and close back below its former major support level at 84.80 that had given way in recent weeks, the prevailing down trend could well reassert itself over the coming sessions to send the rate lower, with the all time low of 79.75 being the next major support level showing on the chart for USDJPY once the more recent 82.87 low gives way..

USDJPY also continues to trade well below its 200-day Moving Average that has now started to slope downwards again after the recent decline in USDJPY. This key indicator now comes in at the 89.64 level and continues to provide a bearish medium term outlook for the pair.

Having closed last Friday at 84.26, resistance for USDJPY shows up at 84.66, 85.38 and 85.92. Initial support is seen near present levels at 84.26 and 84.11, but stronger support is seen in the 83.32/65 region, at 82.87 and below that at the major 79.75 support level.

Overall, this technical scenario for USDJPY argues for seeking rallies to establish positions on the short side from a medium term and short term basis, although long term traders could consider covering shorts or going long at these historically low levels. Furthermore, traders running shorts should watch out for possible sharp upward moves such as that seen last week prompted by rumors of BOJ intervention. Finally, a sustained break to the upside of the medium term downwards slanting trend line now drawn at 85.34 could reverse this primarily bearish outlook for USDJPY.

Note: Past performance is not indicative of future results.

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.