USD/JPY: Dollar Higher On Taper Expectations

 | Jan 21, 2014 07:45AM ET

USD/JPY has posted gains in Tuesday trading, following a quiet start to the week. The pair is trading in the mid-104 range in Monday's European session. The US dollar remains firm as speculation increases that the Federal Reserve will taper QE by another $10 billion at next week's policy meeting. In economic news, it's another quiet day, with no Japanese or US releases scheduled on Tuesday. The markets are keeping a close eye on the Bank of Japan Monetary Policy Statement, which is scheduled for release early Wednesday.

Last week ended on a busy note in the US, which saw the release of three key events. Building Permits showed little change, coming in at 0.99 million, shy of the estimate of 1.01 million. JOLTS Job Openings rose to 4.00 million, increasing from 3.93 million a month earlier. This beat the estimate of 3.97 million, and was welcome news from the employment front after the recent dismal Non-Farm Payrolls release. UoM Consumer Sentiment dropped to 80.4 points, down from 83.5 in the previous release. This was well below the estimate of 83.4, but a reading over the 80 line is certainly respectable.

Weak inflation levels remain a major concern in the US, as persistently low inflation is an indication of an underperforming economy. This was underscored by Core CPI, which posted a weak gain of just 0.1% in December. Producer Price Index posted a gain of 0.4%, reversing directions after three consecutive declines. Last week, Chicago Fed President Charles Evans said that the low rate of U.S. inflation is “both puzzling and worrisome,” and enough reason to maintain low interest rates, even if the employment picture continues to brighten. Analysts will be listening closely as to whether incoming Fed chair Janet Yellen shares these sentiments. Yellen takes over the helm of the Federal Reserve on February 1st.

Japanese manufacturing and inflation numbers looked solid last week. Core Machinery Orders sparkled with a 9.3% gain, crushing the estimate of 1.2%. Tertiary Industry Activity bounced back after two straight declines, posting a gain of 0.6%. This was shy of the estimate of 0.8%. On the inflation front, Corporate Goods Price Index posted a healthy gain of 2.5%, easily beating the estimate of 0.4%. The yen shrugged off these strong numbers as USD/JPY remains listless and continues to trade at high levels.