USD/JPY: buyers feel insecure
By Kira Iukhtenko
Japan Q2 GDP release was one of the most discussed events on the past week. Economy contracted by almost 7% from April to June following a 6% growth in Q1. It was the sharpest decline since the year 2011, when a powerful earthquake paralyzed the country. On the one hand, Abe government warned us about a short-lived economic slowdown following the sales tax hike in April: Japanese households strongly reduced consumption in Q2 after mass purchases in Q1. However, skeptics have already declared the failure of Abenomics. In our view, it’s too early to evaluate the effect of Abe reforms: we need to see the Q3 figures.
There is an increasing pressure on the BOJ to add monetary stimulus in the current environment, but the regulator will do everything possible to avoid this measure. Market understands that, that’s why the USD/JPY reaction to the Japanese economic downturn is muted.
This week USD/JPY extended the recovery from the last week 101.50 low, but faced resistance at 102.60. Note that the price holds above the long-term triangle resistance and above the weekly Ichimoku Cloud. Despite the generally positive dynamics, the market sentiment remains highly uncertain: we see a range of candles with small bodies and long shadows. We recommend buying the pair on a break above 103.00 with an initial target of 104.00 or selling on a break below 101.50 with a target of 101.00.
Japan will release its July trade balance on Wednesday. Increased trade deficit will likely push the expectations of additional stimulus up and support the USD/JPY rate. Next week the major focus will be on the US data: strong figures will also increase demand for the US dollar.