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Yen Weakens on Positive Sentiment

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Yen Weakens on Positive Sentiment

The USDJPY currency pair is poised to test the 100 per yen level as 10-year interest rate differentials tested the highest levels seen in the past 24 months, near 180 basis points.  A stronger than expected Tankan survey gave a boost to the USDJPY currency pair, driving the dollar above the 99 level for the first time since the beginning of June.

Recent releases of Japanese economic data have been positive, and the Tankan survey did not break this string of good releases.  The report surprised on the upside for the large manufacturers which show overall 4 vs. the consensus 3 on the diffusion index and 10 for the overall economic outlook component vs. the consensus 7.

The report also showed that large non-manufacturers showed improved sentiment, with the index rising to plus 12 from plus 6 in the first quarter, beating an 11 forecast. The tankan survey also suggested improvement for business investment plans, with large firms tipping a 5.5% rise in capital spending for the fiscal year through March 2014.  Among medium-sized manufacturers, sentiment improved to minus 4 from minus 14, while small manufacturers also trimmed their pessimism to negative 14 from negative 19.

One benefit to the yen has been the repatriation of yen to purchase stocks which has seen a persistent selling of foreign assets by Japanese investors which shows no signs of declining.  In fact, the selling of foreign bonds reached a new high in the most recent reporting week.  Japan investors have sold a net $93.5 billion of foreign bonds this year and $48.5 billion of foreign equities.

The technical picture for the currency pair is positive with the USDJPY poised to test the 100 level, with support seen near the 10-dya moving average near 97.80.  Momentum is positive with the MACD generating a buy signal last week as the spread crossed above the 9-day moving average of the spread.  The RSI is moving higher but still remains in the neutral range printing near 57.

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