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Yen gains ground against the greenback

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Yen gains ground against the greenback

Despite US yields climbing to the highest levels since August, and the Japanese government approving a new stimulus package, the yen gained ground against the greenback on Thursday, moving toward support levels. Traders will likely square up position ahead of Friday’s release of non-farm payrolls which will likely drive capital markets flow during the balance of 2013.

Japan’s cabinet has approved an 18.6 trillion yen stimulus plan to offset a hike in sales tax that is due to go into effect in April 2014. The cabinet expects the measures to add 1% point to GDP and create around 250,000 jobs. Most of it was spending already announced, but there is 5.5 trillion yen that is new. It will not be debt financed, but through the higher tax revenue and unspent funds. According to the ministry of finance, Japanese investors bought foreign bonds for the 8th consecutive week, but this was offset in full by the sales of foreign equities.

The 10-year yield differential between US treasuries and Japanese Government Bonds soared to 260 basis points which is the highest level seen since mid-2008. The correlation between the yield differential and the USDJPY is nearly 90% which should mean that the USDJPY has more room to climb higher.

The yen gained some traction on Thursday, pushing the USDJPY toward support near the 10-day moving average at 102. 00. The next level of target support is 100.50. Resistance is seen near the recent highs at 103.50. Momentum on the currency pair has turned negative with the MACD (moving average convergence divergence) index has generated a sell signal. This occurs when the spread (the 12-day moving average minus the 26-day moving average) crosses above the 9-day moving average of the spread. The index has moved from positive to negative territory confirming the sell signal. The RSI has moved lower with price action printing near 65, which is on the upper end of the neutral range.

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