December tapering key for dollar yen

  • A clear triangle consolidation pattern being seen on the daily USD/JPY chart;
  • Traders looking for price action to set a potential new direction;
  • A huge raft of fundamental drivers in the coming days.

I highlighted dollar/yen recently as one to keep an eye on given the potential break on the multi-month consolidation pattern. In the short-term, the pair has made a series of lower lows on the daily chart, as seen in the short-term downtrend resistance, which now kicks in around 98.70.

Rising trend support currently comes in at 97.62 and a daily close below here could see the pair trade down to 96.86 (the August 28 low), ahead of the 200-day moving average at 96.46. As you can see, the daily MACD is still not providing any clear directional bias for now, although a break above 99.00 should coincide with a more convincing move above zero. Daily stochastics are showing oversold readings, with this a function of the short-term downtrend.

Fundamentals not providing clarity for USD bulls

Fundamentally traders have been selling USD/JPY and USD/CHF due to the US budget negotiations and I feel the pair will struggle to find any strong upside until agreement has been found and we have seen the debt ceiling being increased. Until that time, traders will be happy to sell USD’s against the JPY and CHF, but on the flipside buy USD’s over commodity currencies on safe-haven demand.

My personal belief is dips to 96.80 could become a good buying opportunity for traders, although my preference right now is to follow the uptrends in cable (as Stan has highlighted in this weeks ‘One to Watch’) and some of the sterling crosses (long GBP/AUD on dips looks good).

A slow improvement in the Japanese economy

The Japanese economy is recovering, and this was highlighted in today’s Q3 TANKAN report, which showed a further increase in the outlook for manufacturing and non-manufacturing business. Shinzo Abe is likely to announce a sales tax increase later today (due to talk at 19:00 AEST), with consumers likely to see VAT increase an extra three percentage points (5%-8%) in April 2014. This is fully in the price as it has been speculated on for a number of months.

The main thing for traders now is how this tax increase will be offset, with local media recently speculating the Japanese government will announce a ¥5 trillion stimulus (1% of GDP) of alternative tax breaks. There has been talk that the ruling parties in Japan will scrap the surcharge on corporate tax, which was set up three years ago to fund efforts for the reconstruction process after the earthquake. The surcharge added to corporate tax was set at 2.55% (to provide a full corporate tax rate of 25.5%), so removing this should aid the economy; although not offset the full amount felt by the rise in the sales tax. My belief is that the BoJ will continue to ramp up the level of easing in the coming months to help offset any concerns around the sales tax and this should continue to provide downside risks to the JPY.

Renewed talk of a December tapering by the Fed and a resolution to the debt ceiling should be the key to see USD/JPY push back convincingly into the 100-105 range.

USD/JPY daily chartUSD/JPY daily chart

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