• Greenback Soars On Stop-Loss Buying
• 79.50 Unlikely
• Sunrise For The U.S. Economy, Or False Dawn?

As the corrective movement from the USD/JPY’s latest upside to 79.36 high appears to have run out of puff at a 79.13 session low, forex traders will be looking to get the pair into recovery mode to claw back those retraced gains to 79.36 and possibly beyond. 

“A daily New York close above 79.20 is needed to negate recent downside pressure for a rally to the 80.63 June high to unfold in the weeks to come”, wrote Commerzbank analyst Axel Rudolph, unable to rule out a slide back towards 78.03/77.90 if the USD/JPY doesn’t close above 79.20.

The dollar’s extended gains came on the coat-tails of the recent upbeat U.S. datase which showed the country’s industrial output rose in July at its fastest pace since April. This followed surprisingly strong retail sales figures across the United States that dampened expectations the Fed will launch another round of bond-buying, or quantitative easing, as early as September. This conspired to push Treasury yields higher and cooled expectations of further Fed monetary easing. Various currency traders speaking to this site said that if U.S. Treasury yields rose further, the greenback could add to gains against the yen given the strong relationship the currency pair has with yield spreads between U.S. and Japanese government bonds. 

The dollar index which measures the greenback against a basket of currencies, rose to a two-week high of 82.881. Commenting, Geoff Kendrick (pictured), currency analyst at Nomura, said: "We are seeing an underlying trend for dollar outperformance, partly on the back of euro zone debt problems, which sees reserve managers prefer the U.S. currency, and more generally due to some decent U.S. data. Dollar/yen could rise to 80 yen, but a lot depends how forthcoming U.S. data is and whether Treasuries will continue to be sold off."

Today, the latest weekly initial claims report and the Philly Fed survey of factory activity in the mid-Atlantic region for August will be watched to assess whether the world's largest economy is regaining momentum in the third quarter.

Beware The False Dawn 

Some analysts warned, however, that the dollar's rise versus the yen could lose completely steam if emerging U.S. indicators disappoint. Not all of yesterday’s data was rosy. A gauge of manufacturing in New York state in August showed a contraction for the first time since October 2011. 

Also on the downside, the country’s jobless claims were seen to have crept higher last week, with new claimants for unemployment insurance putting on 2,000 in the week to August 11 from the previous week. 

In any event, it seems unlikely that the dollar will find it anything other than tough to break above the 79.50 yen to 80.00 yen region unless there is another strong catalyst, given the potential for dollar-selling by Japanese exporters at such levels.

Drew Hillier. Editor, ForexSpace.com