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Yen extends gains despite strong interest rate differential

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Yen extends gains despite strong interest rate differential

The yen extended its gains during Thursday, despite disappointing Japanese economic data. The yield differential between the US dollar and the Japanese yen is consolidating after climbing back to 2013 highs near 220 basis points.  Generally the currency pair will move in tandem with the 10-year yield differential, but after climbing above 100, the USDJPY had faced resistance.  The yield differential is now printing at its highest levels in the past three years.

News from Japan was softer than expected.   Analysts had expected July machine orders to show a rebound from the 2.7% decline in June.  The consensus estimate was for a 2.4% increase, but instead it came out flat.  May saw a 10% increase which had brought about optimism, which has now declined along with the currency pair.

Separately, the MOF weekly flow report showed Japanese investors sellers of foreign bonds for the fourth consecutive week.  This was partially offset by purchases of foreign shares.  Foreign investors bought Japanese shares for the first time in three weeks, though this was matched almost yen for yen by the sales of Japanese bonds.

The USDJPY edged lower on Thursday retesting support near the 50-day moving average which coincides with the breakout level near 99.  Resistance is seen near the recent highs at 100.50.

Momentum on the currency pair is still positive by the trajectory of the MACD is declining and moving the index toward zero.  The RSI (relative strength index) which is an oscillator that measures both momentums along with overbought and oversold levels is moving lower with price action but printing near 53 which is in the middle of the neutral range.

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