USDJPY Outlook: Week of 2/23

by on February 23, 2014 4:45 am BST

The dollar increased the most against the yen last week as monetary policy between the Federal Reserve and the Bank of Japan (BoJ) diverge. The BoJ will continue their massive asset purchasing program while extending special loan programs, while the Fed is determined to wind-down the current $65 billion monthly asset purchases.

The United States and Japan are both feeling unwanted pain from poor economic data, but as the Fed unwinds quantitative easing, market participants are blaming it on poor weather. In Japan’s case, markets just want more stimulus, and that is what they got. The BoJ doubled funding to ¥7 trillion and allowed banks to borrow twice as much capital as previously allowed.

This complacency in the markets is giving the dollar and US equity markets a mulligan as risk tolerance increases, and the USDJPY is a result of that. Lee Hardman, a FX strategist at Bank of Tokyo-Mitsubishi UFJ Ltd., said “investors are becoming more willing to give the US economy the benefit of the doubt by viewing recent weakness as mainly weather related, with the dollar-yen rate having grinded higher.”  According to data from the  Commodity Futures Trading Commission (CFTC), funds and large speculators increased their short positions on the yen against the dollar.

The daily chart of USDJPY shows the price action in a tight consolidation range between 101.65 and 102.65. There have been a few attempts to break to the upside, but the dollar-yen saw selling pressure near resistance. It looks as if price action is coiling itself for a breakout to either direction, although the current sentiment favors to the upside.

The bullish scenario includes a wedge pattern with resistance at 102.65. A break to the upside could send USDJPY to 103.50, the next level of resistance. The RSI is looking bullish as it tracks along an ascending trend line, currently at 49. The +/- DMI are beginning to converge for a potential bullish crossover, but the yen’s volatility can stunt a quick crossover.

The bearish scenario will send the dollar-yen to test support near 101.65 and the current trend line. A close below will give the pair a reason to test lower support at 101.37 and break trend.

1D Chart of USDJPY

1D Chart of USDJPY

Next week will be important for the dollar. CB consumer confidence will be reported Tuesday and new home sales on Wednesday. Unemployment claims and core durable goods will be on Thursday, and prelim GDP QoQ data on Friday.

The markets will likely further discount any poor information due to the weather with equities testing all-time highs, but the dollar-yen will likely remain within the consolidation unless risk sentiment becomes more bullish or bearish.