USD/JPY – Is 110 still a dream or becoming a reality?

September 3, 2014 in Forex Analysis

It was December 28, 2013 i.e. over 8 months back when we had indicate that the year 2014 should see USD/JPY to target 110.00. Well, the pair failed to move beyond 105.44 and had fallen to 100.75. The psychological support of 100.00 ranges had come at rescue but since then the currency pair had been range bound. The maximum it achieved was 104.13 since then. It has been 8 months of classical support and resistance of two major psychological levels, namely 100.00 and 105.00. The long wait ultimately paid off and the price-action did not only break above the resistance of 104.13 but took out 105.00 to go as high as 105.33.

USD/JPY breaks out of the range to indicate returning bullish sentiments - Weekly chart

Consumption tax dilemma and other economic factors

One of the major change during 2014 was the consumption tax hike from 5% to 8% in Japan. This hike was the first hike since 1997 i.e. 17 years. Anxieties were in place before the decision and remained in place after the decision also. Everything going expensive by 3% had to affect the consumption and hence economy. On the other side the plans that there would be another hike of consumption tax during 2015 may counter the effect to some extent, especially for major purchase decisions as the date for the next hike gets closer. If consumers know that prices are going to go up further then they would tend to make any large purchasing decisions sooner. Such a scenario might have added to the strength of the Japanese yen to bring USD/JPY down but a delay in the decision to implement the tax hike should keep downward pressure on the yen.

Let’s have a look on the the effects on the strength of the Japanese yen after the previous hike of the consumption tax during 1997. The following chart indicates that the Japanese yen had in fact strengthened, instead of weakening, after the hike of 1997 and USD/JPY had fallen sharply before it went up very strongly to go as high as 144.77. We had covered this fact in the previous update which we have mentioned above.

This time the effect of the change in tax did not really affect the strength of the yen and the pair had kept it self in a range. As reported by Reuters yesterday that the Prime Minister Abe has been advised to delay the next hike. The economy certainly did not show bullishness since the tax was increased on April 1st, 2014.

USD/JPY price action after the previous consumption tax increase.

Let’s have a look on the recent economic releases from Japan:

1) Year-over-year overall household spending declined by -5.9% in July. The result was worse than the data of June where the decline was -3.0%.

2) July 2014 also saw a decline in national consumer price index from previous 3.6% to 3.4% on year-over year basis.

3) Unemployment increased from 3.7% to 3.8%.

4) Preliminary data indicated that the industrial production went drastically down to -0.9% on year on year basis in July. June had shown an increase of 3.1%.

5) Year-over-year change in the retail trade was positive. The retail trade grew by 0.5% in July against a drop of -0.6% in June.

6) Housing starts saw a drop of -14.1% in July as compared to the same month of 2013. This is showing an increase in negative momentum as the month of June had a drop of -9.5%.

7) The growth in the capital spending in quarter 2 was down to 3.0% from quarter 1’s 7.4%.

8) August 2014 saw a drop in the vehicle sales. The change was -5.0% as compared to the vehicle sales in August 2013.

What to expect from USD/JPY

From pure price-action point of view and also considering the break of 105.00 psychological level for the second time, it is expected that this time the price will sustain over 105.00 to go for further gains.  The previous move to 105.44 had completed the 61.8% retracement of the fall from 124.16 to 75.36. If it was just a case of upward consolidation then the price-action should have reversed back. However the continuous support over 100.00 and another break over 105.00 suggests that the uptrend has not ended.

USD/JPY Historical chart showing that pair had broken over 61.8% retracement for the fall from 124.16.

The increase in the unemployment rate, the drop in the industrial production and other weak economic reports from Japan also go in the favor of this outlook. While saying this, we will expect the the resistance to hold for sometime in the range of 105.44 to 105.60. If this resistance holds then some correction will be expected first but we expect any downward moves to be limited to 104.13, which should now turn into support. With 104.13 support in place, a break over 105.60 should target 107.20/107.40 next and then 110.00 psychological level. As we had mentioned during December 2013, we expect USD/JPY to target 110.00 level in coming months.

1997, the year of previous consumption tax hike, was a different period. The uncertainties about the economy were too so high. Even the tax increase had made people helpful that it would help the economy and hence JPY strengthened initially before the realities struck and the yen went down rolling. The current situation is different. People are afraid of any change which increase the cost of living and they would try to cut down the cost. The rate hike and the possibilities of another hike should keep at least the retail sales in check and that would go against the yen but will help the Japanese exports. Considering we will not expect any strong upward trend for USD/JPY beyond 110.00.

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