USD/JPY looks to 106 support level – what may happen?

The USD/JPY pair has been in the forex trading news for a number of reasons in recent days.

One reason why traders are questioning the yen’s long-term future was the release of Japan’s gross domestic product (GDP) information, which came out recently and which was less than pleasant for traders.

It revealed that Japan’s GDP was now sitting at -7.8%, which was a more severe contraction than had been expected.

Many analysts had predicted that the figure would be closer to -7.6%.

The result confirmed that Q2 2020 has rendered Japan’s economic shrinking as the poorest ever recorded.

Like all major nations, the coronavirus pandemic has inflicted serious damage on the Japanese economy.

Part of the problem lies in the fact that some of Japan’s primary exports, such as cars, were out of demand across the globe as incomes fell due to the pandemic.

Several of the countries that purchase Japanese cars have also gone into recession, leaving yen traders concerned about the future of the Japanese economy.

However, fundamental analysis cannot reveal everything, and the recent announcement of these less-than-favourable GDP figures demonstrated this.

The fact that the announcement was negative did not lead to significant trouble for the yen, at least in the short term.

According to strategists, the next step for the pair in terms of immediate intra-day timeframes remains uncertain.

Should the pair experience a bullish rise, it could face levels of 107.05 in terms of resistance.

On the potential support side, meanwhile, the currency could find itself at 106.00.

This is a significant milestone for the currency, especially given that it is a round number and hence carries a significant amount of psychological importance.

In terms of the economic calendar, meanwhile, the Japanese yen has a lot on its plate in the coming days.

On Tuesday evening, there will be a machinery orders release covering June out at 11:50pm GMT, and this is set to be closely watched by those who are interested in the health of the country’s manufacturing sector.

This is expected to show a change from 1.7% to 2% on a month-on-month basis.

In the same time slot, meanwhile, there will be a merchandise trade balance figure for July.

The country’s imports and exports information will also be revealed in this time slot.

Looking ahead to further in the week, the yen will need to contend with a release covering foreign investment in Japanese stocks – and a separate one looking at foreign investment in bonds.

This release is expected to come out at 11:50pm GMT.

On Thursday, yen traders will be able to get some indication of inflation levels in the country.

The national consumer price index for July will be released at 11:30pm GMT on that day, and will be split into a figure that incorporates food and energy and another that does not.

About the author: Justin Freeman

Justin is an active trader with more than 20-years’ industry experience of working for big banks and hedge funds. He has an inside knowledge of how the financial markets work, thanks to roles including trader on a $750m Event-Arbitrage desk and CRO and COO of hedge funds running a variety of strategies. From stat-arb and trend-following CTA to fixed-income relative value. Firm’s he has worked at include big banks like Citi, and prominent hedge funds including D. E. Shaw and Millennium Capital Management.

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