The USD/JPY failed in its recent attempt to build positive momentum from our 1st tier uptrend line.  The currency pair has since fallen back to our 1st tier downtrend line on declining volume.  Though the currency pair is trading comfortably above July lows, investors are hesitant in making a larger, necessary commitment to the upside.  Japan will release its trade balance late Wednesday and the data will monitored closely by investors.  Analysts are expecting further improvement (0.51 trillion) from last month’s surprising 0.22 trillion surplus.  

However, should the trade balance come in below June’s release, the USD/JPY could be under some near-term selling pressure.  Investors should keep in mind last month’s 0.22 trillion surplus was a vast improvement from Japan’s budget deficit since September 2008.  Therefore, expecting an increase from 0.22 to 0.51 trillion may be a bit bold.  Though we anticipate an improvement from 0.22 trillion, we believe the trade balance number may not live up to expectations.  We will just have to wait and see.

Regardless of tomorrow’s trade balance data, the behavior of the S&P futures should have a greater near-term impact on the USD/JPY.  If the S&P can manage to break free of 950 and 2009 highs, this could help the USD/JPY strengthen back above its 1st tier uptrend line.  A recovery in the U.S. economy trumps Japan’s trade balance since this would imply an improvement in consumption and demand for Japanese exports.  On the other hand, a large setback in Japan’s trade balance could strike overall investor confidence since it implies global demand and consumption may not be picking up as much as anticipated.  Technically speaking, our 1st tier uptrend and 2nd tier downtrend lines serve as near-term barriers along with the psychological 95 area.  As for the downside, the USD/JPY has our 1st tier downtrend line, previously July lows, and the highly psychological 90 level to fall back on.        

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