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Japanese Yen Depreciates Despite CPI Beat, Looks to Tokyo Open

Japanese Yen Depreciates Despite CPI Beat, Looks to Tokyo Open

Daniel Dubrovsky, Contributing Senior Strategist


Talking Points:

  • Japan CPI crossed the wires and destroyed all of economists’ expectations
  • Yet, the Japanese Yen depreciated against its major peers in the aftermath
  • The data seems unlikely to alter BOJ monetary policy course in the near-term

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The Japanese Yen appreciated, but only a little bit relatively speaking, immediately after a local CPI report crossed the wires. Japan’s national consumer price index came in at 1.4% y/y versus 1.3% expected. Excluding fresh food, prices rose 0.9% y/y versus 0.8% expected. Finally, removing food and energy, inflation was 0.4% versus 0.3% expected.

So, all around better than expected data. In fact, the headline rate was the highest since early 2015, almost three years ago. In addition, the core reading that excludes energy and food prices, was also the highest since August 2016. Yet, Yen reaction was rather mute initially. In fact, shortly after the data was released, USD/JPY pulled back to where it was prior to the announcement and continued climbing as if the data never happened.

That could have been for a couple of reasons. First, even though inflation is moving closer to the Bank of Japan’s target, the core rate is still far off the 2 percent target. In other words, the central bank might not do much in response to the data. Its next policy announcement is in early March, we will find out what they have to say about the report then.

The second reason is that the anti-risk Yen has been more interested in how the stock markets have been behaving. Just yesterday, the currency appreciated as Japanese stocks opened lower following the FOMC minutes. With that in mind, the currency will probably continue closely following shares. The Tokyo stock exchange opens for trading half an hour after the CPI release.

On a daily chart, USD/JPY seems to be attempting to resume its dominant downtrend since early January. That was back when the pair was unable to pierce above a long-term falling trend line from August 2015. The pair has since formed a new high of 107.90 on February 21st and is heading lower towards the 23.6% Fibonacci extension level of 106.05.

A break below 106.05 will expose the February 16th low of 105.54 which is also closely aligned with the long-term rising trend line from June 2016. A break below this support will expose the 38.2% extension at 104.90. If USD/JPY reverses course and pushes above the February 21st high and the short-term falling trend line, the 38.2% Fibonacci retracement at 108.54 might stand in the way as resistance.

Here is a closer view of the two long-term trend lines converging on a weekly chart:

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.