Dollar/yen reached 8 month highs, but could not sustain all the gains, as the yen eventually enjoyed some safe haven flows due to fiscal cliff issues. Household Spending, Tokyo Core CPI and Retail Sales are the main events on our calendar. Here’s an outlook for the Japanese events and an updated technical analysis for USD/JPY.

Last week The conservative Liberal Democratic Party has returned to power. Prime Minister Yoshiko Noda resigned after the elections calling the results a “disappointment.” The new Prime Minister Shinzo Abe, is set to enact an extra loose  monetary policy to boost the economy and work towards renewing good relationships with China. Will he succeed to improve economic activity in Japan? In the US, the collapse of fiscal cliff talks and Plan B dampened the global mood and sent the dollar higher and the yen even higher.

USD/JPY daily chart with support and resistance lines on it. Click to enlarge:USDJPY Technical Analysis December 24 28 2012

  1. CSPI: Monday, 23:50. Japan’s corporate service price index dropped 0.7% on a yearly base in October, decreasing for the fifth month due to lower costs in the advertising and information communications sectors. The reading was worse than the 0.6% drop forecasted. In September, prices dropped 0.5%. Another decline of 0.6% is expected this time.
  2. Monetary Policy Meeting Minutes: Tuesday, 23:50. The last BOJ policy meeting minutes revealed a strong disagreement between board members  pressing to maximize the ultra-loose policy, siding with Shinzo Abe, the leader of the opposition Liberal Democratic Party and between BOJ Governor Masaaki Shirakawa’s supporters claiming monetary easing alone, without active government  fiscal reform cannot defeat deflation. Shirakawa did not specify when the next easing measures will occur but showed readiness to act again should Japan slip deeper into recession.
  3. Housing Starts: Thursday, 5:00. Housing starts in Japan surged 25.2% on a yearly base in October, a second consecutive rise, following a 15.5% increase in September. The rise occurred in light of a 5.8% drop in October 2011, when demand declined after the government ended its subsidies for building energy-saving homes in July 2011.  Another climb of 10.9% is expected now.
  4. Manufacturing PMI: Thursday, 23:15. Japanese manufacturing activity plunged in November at the fastest pace in 19 months, to a seasonally adjusted 46.5 in November from 46.9 in October. The weak figures go hand in hand with the slowdown in overseas markets which will probably cause another GDP contraction in the fourth quarter.
  5. Household Spending: Thursday, 23:30. Japanese household spending fell 0.1% in October from a year earlier following a 0.9% plunge in September. However the decline was less than the 0.8% drop expected. Spending increased 0.6% from the previous month. An increase of 0.8% is forecasted.
  6. Tokyo Core CPI: Thursday, 23:30. The early core inflation indicator from Tokyo declined 0.5% in November from a year ago, after a 0.4% drop in the previous month. The reading was worse than the 0.4% decline predicted by analysts. Meanwhile the national core CPI stayed unchanged, beating forecasts for a 0.1% decline. Tokyo Core CPI is expected to decline 0.5%, while National core CPI is forecasted to decline 0.1%.
  7. Prelim Industrial Production: Thursday, 23:30 Japan manufacturing output edged up unexpectedly in October, rising 1.8% amid new IPhone surprising gains. This increased followed a 4.1% drop in September. Analysts expected a decline of 1.8% in October. The recent reading exemplifies Japan’s dependence on foreign market demand. A drop of 0.5% is anticipated now.
  8. Retail Sales: Thursday, 23:50. Japan’s retail sales declined more than predicted in October, down 1.2% from a year ago, following a 0.1% rise in September, Indicating Japan’s retail sales are faltering due to the general slowdown in economic activity. Analysts forecasted a smaller drop of 0.7%.  A rise of 1.3% is forecasted.
  9. Average Cash Earnings: Friday, 1:30. The average cash earnings per regular employee in Japan registered the first climb in four months, rising 0.2% in August on a yearly base following 0.5% decline in July. However the recovery in wage growth is marginal since base wages were barely changed. A decline of 0.4% is expected this time.

*All times are GMT.

USD/JPY Technical Analysis

$/¥ started the week with a leap following the elections, but could not breach the 84.20 line (mentionedlast week) at first. It then continued higher, reached 84.50 before retreating.

Technical lines from top to bottom

86.27, which served as resistance, also in 2010, is the high point we start at. 85.50 is a high peak seen back in early 2011.

84.20 is a more recent swing high, seen in early 2012. This is now critical resistance for any move forward.An initial move above this line in December 2012 turned into a false break. It is followed by 83.34 which capped the pair in April and also beforehand. It switched to support after the surge in December.

82.87 is a veteran line – that’s where the BOJ intervened for the first time back in 2010. The line also capped the pair during November and December 2012.

81.80 capped the pair in April, and is the level of the “shoulders” in the upwards thrust seen at the time. It worked perfectly well as support in December 2012. 81.43 is stronger after serving as resistance for a recovery attempt back in 2011, and capped a move higher in November 2011.

80.70 worked as resistance back in June and in a stronger manner in October. It turns into support now. The round number of 80 is psychologically important, even though it was crossed several times in recent months.

79.70 was a cap was seen in June 2012. It proved its strength as resistance once again in July 2012 and proved critical before the downfall in August 2012. It strengthens again after capping the pair during November 2012.. 79.05 capped the pair in September 2012 and similar levels were seen in the past. Despite being temporarily overrun, the line still matters, especially after working as support in November 2012.

Channel Remains Very Relevant

As the chart shows in the black lines, the pair is trading in an uptrend channel since early October. While it broke above the channel at one stage,and recently once again, it returned back to the channel.

Another Recent Technical View: Forex Analysis: USD/JPY Advance Stalls around Key Resistance - by James Chen.

I remain bullish on USD/JPY.

The new Japanese government will begin working this week, and at least at first, they are expected to stick to promises, thus adding more pressure on the yen. In addition, there is a good chance that the recentblame game in the US cliff talks could just be a last minute battle before a deal is made. A deal would weaken the yen

Further reading:

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