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USDJPY: Yen Grind Continues as Japan Exits Recession

The USDJPY pair is little changed today as the market reacts to a confluence of a weaker US dollar and the strong Japan Q3 GDP data. It is trading at 104.60, which is 1% below last week’s high of 105.67.

In a report earlier today, Japan’s Cabinet Office said that the country’s economy bounced back in the third quarter. Data from the office showed that the Japanese economy rose by a record 21.4% from a low base of 28.8% contraction in the second quarter.

Nonetheless, this performance was better than the consensus estimates of 18.9%. Most importantly, the economy rose by 5.0% from the same period last year.

Most sectors of the economy did well in Q3. Notably, personal consumption increased by 4.7% while external demand increased by 2.9%. The latter is particularly important because of the importance of exports to the Japanese economy. Fixed asset investments dropped by 3.4% as companies embarked on cost cutting measures in their bid to preserve cash.

However, the biggest risk is whether Japan’s economy will continue strengthening as its main markets embark on circuit-breaker measures to reduce the spread of the virus. For example, in the United States,  some states have started implementing lockdowns as the number of new infections get out of hand.

Meanwhile, the USD/JPY is also falling because of the weaker dollar. The dollar index has dropped by more than 0.15% as traders reflect on the rising hopes of a Covid-19 vaccine.

USDJPY technical outlook

Turning to the hourly chart, we see that the USDJPY price has been on a strong downward trend since Wednesday last week. In this period, it has moved from a double-top high of 10564 to today’s low of 104.48. The price is slightly above the 50% Fibonacci retracement level at 104.43. The downward trend is also being supported by the 15-day and 25-day exponential moving averages.

Therefore, for today, I suspect that the pair will continue falling, with the level to watch being the 50% retracement at 104.43.  This implies a 0.15% decline from the current level. For this trade, the resistance will be at 104.70.

USD/JPY technical chart