USD/JPY – Yen Inches Lower, Markets Eye Yellen Testimony

The Japanese yen has posted small losses on Wednesday, reversing the upward movement which marked the Tuesday session. The pair is trading at 104.60 in the North American session. On the release front, Japan will release Flash Manufacturing PMI, with the indicator expected to point to contraction in the manufacturing sector. In the US, Existing Home Sales improved to 5.53 million, matching the estimate. Crude Oil Inventories posted another decline, coming in at -0.9 million.

Janet Yellen appeared before a Senate finance committee on Tuesday, and her testimony was cautious and tentative. Yellen acknowledged that the US economy could be stronger, saying that “[c]onsiderable uncertainty about the economic outlook remains”. As expected, Yellen provided no hints with regard to the timing of a rate hike, leaving the markets doubtful that we’ll see a rate hike in July. Yellen said she does not expect the US economy to enter a recession, but if such a scenario did occur, the US would not follow Japan and Europe and adopt negative interest rates. On a more positive note, Yellen said that weak oil prices, low interest rates and stronger wage growth should support consumer spending. Yellen continues her testimony on Wednesday before a House financial committee.

With just one day left until the Brexit referendum vote in the UK, the campaign between the “In” and “Out” camps is going down to the wire. The stakes are tremendous, as the UK economy of GBP 2.9 trillion is the fifth largest in the world, and number two in Europe, after Germany. Polls continue to predict a very close vote, but market sentiment is leading towards the UK staying within the EU. This sentiment has boosted the British pound in recent days against the dollar and the euro. Prime Minister David Cameron and other prominent British personalities have warned that a vote to leave the EU would damage the UK economy, while the “Leave” vote has tapped into voter dissatisfaction with Brussels, particularly concerning immigration. The “Leave” camp also claims that EU over-regulation has stifled British businesses, and point to countries such as Switzerland that have close economic relations with the EU but are not part of the bloc. Still, leaving the comfort zone of the EU would be a journey into the unknown, and analysts predict that if the UK exits the EU, the pound could dive by as much as 10 percent.

The BoJ released the minutes of its April policy meeting earlier this week, and was pessimistic about inflation levels and risks to the Japanese economy. At the April meeting, the BoJ held off from further monetary easing, as it did in the June policy meeting. In the minutes, policymakers said expressed concern that weak global conditions pose risks to the economy and said that lower inflation forecasts from the BoJ were due to downward revisions in GDP and weak wage growth.

With the BoJ shying away from further easing, the Japanese yen could take advantage and continue to climb against the US dollar. USD/JPY has climbed 6.4% so far in June, and dropped to 103.50 on Monday, its lowest level since August 2014. The yen’s strength has alarmed Japanese policymakers, who continue to warn against currency manipulations. On Friday, Japanese Finance Minister Taro Aso said that he wanted global coordination against what he termed “abrupt changes” in currency movements. The US has called on Japan to refrain from any unilateral movement, and at the recent G-7 meeting of finance ministers, the US and Japan publicly bickered as to whether the yen’s rise was a “disorderly movement”. If the yen continues to move closer to the symbolic 100 level, the rhetoric over this issue is likely to heat up.

USD/JPY Fundamentals

Wednesday (June 22)

• 10:00 Federal Reserve Chair Janet Yellen Testifies
• 10:00 US Existing Home Sales. Estimate 5.53M. Actual 5.53M
• 10:30 US Crude Oil Inventories. Estimate -1.3M. Actual -0.9M
• 22:00 Japanese Flash Manufacturing PMI. Estimate 48.2

Upcoming Key Events

Thursday (June 23)

• 8:30 US Unemployment Claims. Estimate 271K

*Key events are in bold

*All release times are EDT

USD/JPY for Wednesday, June 22, 2016

USD/JPY June 22 at 10:40 EDT

Open: 104.71 Low: 104.31  High: 104.77 Close: 104.64

USD/JPY Technical

• USD/JPY posted small losses in the Asian session. The pair has shown limited movement in the European and North American sessions
• 103.73 is providing support
• 104.99 is a weak resistance line
• Current range: 103.73 to 104.99

Further levels in both directions:

• Below: 103.73, 102.36 and 101.07
•  Above: 104.99, 105.87 and 107.16

OANDA’s Open Positions Ratio

The USD/JPY ratio is almost unchanged on Wednesday, consistent with the lack of significant movement from USD/JPY. Long positions have a strong majority (69%), indicative of trader bias towards USD/JPY continuing to move to higher ground.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.