USD/JPY dives again today following the sharp fall in treasury yields. Yield on 30 year bonds fell to 3.776% while yield on 10 year note also dropped to 2.614%. Both were way off last week's close of 3.87% and 2.686% and both hit new 16 months low. The benchmark 10 year JGB yield also dropped to 7-year low of 0.945% following poor GDP data from Japan earlier today. German bund yield and UK GIlt yield both stay near recent low on concern of global economic slow down. Some fresh selling in USD/JPY is seen in early US session after disappointing Empire state manufacturing index. Investors seem to be forgetting the risk of intervention on USD/JPY.

Data released today saw real GDP in Japan rose merely 0.4% annualized rate in Q2, comparing to consensus of 2.3% and prior quarter's 4.4%. Nominal GDP dropped -0.9% on the quarter to JPY 118T or USD 1.288T, which was below china's nominal GDP of USD 1.337T in the same period. Some analysts said that China's GDP could surpass Japan in 2010. UK Rightmove house price index dropped -1.7% mom in August, worst in eight months. Eurozone CPI was finalized to be 1.7% yoy in July, with core CPI at 1.0% yoy. US empire state manufacturing index rose less than expected to 7.1 in August. TIC capital flow beat expectation by rising to 44.8b in July.

Dollar is under some pressure today, in particular against Japanese Yen and Swiss Franc and the greenback is paring last week's gain against most major currencies. Dollar index dips sharply and is way off today's high of 83.01. At this point, we'd still favor another rise as long as 82.11 minor support holds. Decisive break of 83.45 cluster resistance (38.2% retracement of 88.70 to 80.08 at 83.37) will confirm that whole fall from 88.70 has completed and should bring further rise to 61.8% retracement at 85.40 at least. However, break of 82.11 support will dampen the immediate bullish view and turn outlook neutral first.

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USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 85.71; (P) 86.04; (R1) 86.52; More.

USD/JPY's sharp fall today dragged 4 hours MACD below signal line and indicates that recovery from 84.71 was completed at 86.36. Intraday bias is turned neutral for the moment. Such development dampens the view that USD/JPY has bottomed and argue that recent decline is still in progress. As noted before, sustained trading below 84.71 will confirm long term down trend resumption for 80 psychological level next. Though, above 86.36 will put focus back to 88.11 resistance instead.

In the bigger picture, whole down trend from 2007 high of 124.13 is still in progress, but there is no confirmation that it has resumed. Consolidation from 84.81 could still have another rising leg and above 88.11 will bring another rise towards 55 week EMA (now at 91.68). But upside should be limited below 94.97 resistance. On the downside, sustained trading below 84.81 will confirm long term down trend resumption for 79.75 (1995 low). In another case, we'll stay bearish as long as 94.97 resistance holds.

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