USD/JPY Outlook – December 6-10

Many events await USD/JPY traders this week with Core Machinery Orders, Final GDP and BSI Manufacturing Index. Here's an outlook for the Japanese events and an updated technical analysis for USD/JPY.

USD/JPY daily chart with support and resistance lines marked. Click to enlarge:

Japan's economy probably grew faster than anticipated in the last quarter Gross domestic product expanded an annualized 4.2 % in the third quarter and capital spending excluding software rose 4.8 % however the Yen's strength against the dollar this year is threatening the profits of exporters and eroding the competitiveness of Japanese companies aboard. An ongoing recovery may continue for capital spending, but companies are pessimistic about their sales because of deflation. With the Stimulus Package passed by the Japanese parliament is there hope for careful optimism? Let's start:

1. Leading Indicators: Tuesday 5:00. Japanese Leading Indicators Index Combines the reading of 12 economic indicators came out at 98.9% following 99.4% in September. The reading was less than 99.4% expected. Further decline to 97.6% is expected now.
2. Core Machinery Orders: Tuesday 23:50. Japan's core private-sector machinery orders plunged, as expected, by a seasonally adjusted 10.3% in September from the previous month after large orders pushed up Augusts' figure to a surprise +10.1. Looking at the longer-term trend, the Cabinet Office believes "Machinery orders are picking up." Core Machinery is expected to remain flat this month.
3. Economy Watchers Sentiment: Wednesday, 5:00. Confidence among Japan's service sector dropped from a previous reading of 41.2 in September to 40.2 in the recording period and marked the lowest reading since January. The end of the governments subsidy program for the purchase of eco-friendly cars and products in September, together with a decline in demand following the tax hike on cigarettes, collectively, had a negative effect on household spending, business activity and employment conditions. This month a rise to 42.3 is predicted.
4. Final GDP: Wednesday, 23:50. Final GDP reading grew by 0.4% in the second quarter compared to 0.1% expansion in the first quarter. The reading was inline with analysts' expectations. An increase of 0.1% is forecasted.
5. BSI Manufacturing Index: Thursday, 23:50. BSI Manufacturing Index, an indicator of business sentiments in manufacturing industry, grew by 3.3 points to 13.3 in the 3rd quarter much better than the 6.3 forecast. However, big Japanese manufacturers expect conditions to worsen in the last quarter of 2010 because of slowing overseas growth and a strong yen. Further growth to 14.3 is expected now.
6. Household Confidence: Friday, 5:00. Household Confidence report showed reading of 40.9 for October, 0.30 higher than the consensus expectation and 0.30 below the previous report. The Household Confidence determines the mood of households regarding economic activity and is concluded from a survey of about 5000 households. Another encouraging news also for the Household Confidence with a rise to 42.3.

* All times are GMT.

USD/JPY Technical Analysis:

Dollar/Yen traded between 0.8440 and 0.8340 throughout most of the week, and on Friday it made a sharp drop under the 82.87 line (mentioned last week) to close at 82.53.

Looking down, the next line of support is 82, the round number that capped the pair during October and November. Below, 80.87 is a weaker line, after providing support at the beginning of October.

Below, 80.40 is the lowest close the pair ever had, and it's followed by the lowest intra-day low of all times 0.79.75.

Looking up, 82.87 now caps the pair. This was the line before the intervention. It's followed by 83.40, which provided support in the past week.

Higher, 84.11 turned into minor resistance and it's followed by 84.40, the highest level in two months. It worked as a stubborn peak in the past week.

Higher, the next lines are rather close – 86.35 was a support line in July and later switched to resistance. Right afterwards, 86.88, that worked as support earlier.

More important resistance is found at 88.10, which was a support line in March and later served as resistance. The last resistance line for now is 89.15 which capped the pair quite some time ago.

I remain bullish on USD/JPY.

Lower tensions in the Korean peninsula sure helped the yen, but the higher US yields, together with the looming option of another intervention to weaken the yen, can boost the pair.

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