Why USD/JPY Could Fall Next Week

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Market Drivers for March 29, 2013
Markets dead due to Easter holiday
Amaro wants to sit in on the BOJ meeting
Nikkei 0.50%
Oil $97.25/bbl
Gold $1595/oz.

Europe and Asia:
JPY Nomura/JMMA Manufacturing PMI 50.4 vs. 48.5
JPY Jobless Rate 4.3% vs. 4.2%
JPY Household Spending 0.8% vs. 0.4%
JPY National CPI-0.5% vs. -0.6%

North America:
USD Personal Income 8:30
USD Personal Spending 8:30
USD Personal Consumption Expenditure Core 8:30
USD U. of Mich Confidence 8:55

With most of the key G-10 markets closed for Easter holiday currency are doing absolutely nothing today as dealers are simply maintaining quotes in very thin trading. On the economic front the data out of Japan was mixed with PMI Manufacturing rising above the 50 boom/bust line in nearly a year while unemployment upticked to 4.3% from 4.2% eyed.

The expansion in PMI Manufacturing from 48.5 to 50.4 was no doubt welcome news to the Abe administration as it was clear evidence that the weak yen policy is starting to help the beleaguered manufacturing sector. On the other hand factory production unexpectedly fell to -0.1% from 2.5% projected contracting by -11% on a year over year basis signaling that production remains in a very deep slump and is unlikely to recover through exchange rate policy alone.

In addition to the mixed production data, the latest CPI figures showed that Japan remains mired in deflation with core CPI at -0.3% versus -0.4% eyed. The news suggests that it will be exceedingly difficult for Japanese monetary policy makers to reach their target of 2% inflation any time soon.

Next week all eyes will turn to the BOJ meeting next Wednesday and Thursday. Market expectations are running high that the new team at BOJ will assume a much more aggressive stance towards monetary policy increasing QE dramatically. Some experts anticipate that the BOJ will ramp up its program from 130 Trillion yen to 160 perhaps 170 Trillion yen in order to provide more liquidity to the economy.

This week USD/JPY has been under pressure sinking to a low of 93.50 before rebounding. The conventional wisdom has attributed the decline to fiscal year repatriation flows. However, with most of those flows now done, the pair has shown little inclination to rally. Therefore, the bulls may be in for a shock next week, especially if the BOJ policy makers proceed with caution increasing QE only modestly. Under that scenario the pair could break below the key 93.50 support and test the 92.00 level much to the surprise of those analysts who are looking for the pair to trade to 98.00 over the near term horizon.

The fact of the matter is that after jawboning the market for months, Japanese policymakers will now need to act in order to sustain the rally in USD/JPY. Otherwise the pair may unwind some of it recent gains on profit taking and market disappointment.

Boris Schlossberg
Managing Director

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