After reaching 78.27 last week on concerns over Japan’s first monthly deficit in nearly 30 years and a decline in growth outlook, USD/JPY started this week in familiar territory again 76.60 – 76.80.  Other than Japan’s Jobless rate tomorrow, there isn’t much news to trade with.  Perhaps of more interest is the EUR/JPY movement where Japanese officials have recently hinted concerns over its rapid decline against the JPY.  We think the market may test ‘BOJ water’ this week with sub 76.00 and we dare say 75.00 to see if there is any ‘intervention bites’ around.  For the rest of Monday market may range 76.54 – 77.12.

USD/JPY finally broke Jan high (77.34) today hitting 77.39 at the time of writing. This may be on the back of news that Bank of Japan cut its growth outlook. Governor Shirakawa and board members lowered the economic forecast to 2 percent from an October estimate of 2.2 percent for fiscal 2012.  In addition we heard funds bought large in the run up hoping to trigger stops above 77.40.  We think this resistance will not be easy to break hence going short with a tight stop is worth considering if the risk/reward for you makes sense.  Technically 76.50 should be quite solid now if not for anything other than the chance of BOJ intervention.  The next level on the top side is 78.25.

With a trading of 76.69 to 76.87 for the last 12 hours into the day and especially during Asian time, one would question how one can prosper from this currency pair?  The answer may that you need to be patient.  The FX Market is wary of Japanese officials’ concern about the JPY’s rapid strength and how it is not reflective of the country’s economics but traders expect the chance of intervention would rise if USD/JPY revisits record low of 75.31 and or EUR/JPY falls to around 95.00.  With that we think that for the rest of the day it may just trade between 76.50 to 77.11.

USDJPY stays in a trading range between 76.60 and 77.32. Lengthier consolidation in the range would likely be seen in a couple of days. Key resistance is at 77.32, a break above this level will confirm that the fall from 78.21 had completed at 76.60 already, then further rise to test 78.27 resistance could be seen. Support is at 76.60, only break below this level could trigger another fall to 76.00 zone.

Daily Forex Forecast

The Japanese yen (JPY) has been slowly strengthening, particularly vs. the US dollar as the monetary polcies of the two respective Central banks are seemingly moving in oppostie directions.  On the one hand, the rumors are flying that perhaps we are going to see QE3 here in the US as the economy continues to flounder, while the BOJ just announced the other day a paltry increase to their asset purchase program.

The markets have been expecting some type of currency intervention as the BOJ has been known to do that in the past, despite it being largely ineffective.  But there is some new blood at the BOJ now who may be trying to buck the conventional wisdom.  After all, it has been that conventional wisdom that has kept them mired in the “Lost Decade”– for the past 20 years!

While a strengthening currency can make exports less attractive around the globe, it also means that things abroad will be less expensive.  Perhaps this new-found “wealth” effect that the Japanese are seeing will be just what they need to break the cycle  of economic futility. 

75 is the next level we are watching in USD/JPY and should no intervention materialize (despite the jaw-boning) then maybe Yen can continue to rise at this slow pace.  It seems as though the US is following Japan down this road so perhaps folks at the Fed should pay attention!

After breaking below 75.96 previous low, USDJPY bounced from 75.81. Key resistance is now at 76.47, as long as this level holds, the bounce is treated as consolidation of downtrend from 77.48, another fall towards 70.00 is possible after consolidation. However, a break above 76.47 will indicate that lengthier consolidation of the longer term downtrend from 85.51 (Apr 6 high) is underway, then another rise to test 77.85 resistance could be seen.

Over the past few weeks, the USD/JPY pair has been trading in a fairly tight range for the safe haven currencies.  A bottom had been put in near 76 after the Bank of Japan intervened in the currency the last time the Yen saw that level vs. USD.

So there were many questions as to whether or not the Yen would be deemed a more “desirable” safe-haven as the risk aversion due to the Euro debt crisis picked up.   Surprisingly, the markets didn’t really favor one over the other to this point, and the BOJ resolve to weakne the Yen was not re-tested.

Thus a range was created between 76-77 for USD/JPY and it had been trading there ever since.  But now, with the vote for the EFSF having passed in Germany (they were seen as the biggest potential obstacle) the market may move back toward risk taking which should encourage US Dollar buying vs. the Yen.   With clear support established at 76, a confirmed breakout above 77 means that we could be at 79 in no time.

USD/JPY made an all-time low last Friday, just touching below 76 for the first time before bouncing back higher.  This has prompted the rhetoric to pick up, as the BOJ further threatens intervention.  However, it is likely that the BOJ won’t do anything until after Bernanke’s speech on Friday as the world waits to see if QE3 is launched by the Fed.

If so, then the rush of Dollar-selling could be too much for the BOJ to attempt to thwart, though it is unclear exactly what will happen.   A counter-intuitive argument could be made that things look so bad that the necessity for QE3 actually induces the flight to safety trade and rush to the Dollar.  This scenario is improbable however, and USD/JPY could further weaken adding pressure on the BOJ to act.

The best case scenario for Japan would be for the Fed to ditch the calls for QE3, which could cause the Dollar to strengthen, though other world markets could sell-off which could strengthen the Yen as well.

It’s not a pretty picture for the BOJ!

USDJPY traded in a narrow range between 76.29 and 77.19. Another fall to test 76.29 support is still possible, a breakdown below this level could signal resumption of the long term downtrend. Resistance is at 77.19, only break above this level will indicate that the downward move from 80.23 has completed at 76.30 already, then the following upward movement could bring price back to 79.00-79.50 area.

Daily Forex Analysis

USDJPY moved sideways in a narrow range between 76.29 and 77.19. Key resistance is at 77.19, a break above this level will indicate that a cycle bottom has been formed at 76.30 on 4-hour chart, and the fall from 80.23 has completed, then further rally could be seen to 79.00-79.50 area. On the downside, a breakdown below 76.29 support will indicate that the long term downtrend has resumed, then next target would be at 73.00 area.

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