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USD/JPY Fundamental Analysis – Forecast for October 2016

By:
James Hyerczyk

The Japanese Yen remained in a relatively tight range for a second straight month in September as investors continued to build a support base near the

japanese-yen-symbol

The Japanese Yen remained in a relatively tight range for a second straight month in September as investors continued to build a support base near the psychological 100.00 level. Last month, the price action was primarily two-sided with a slight downside bias before the USD/JPY settled at 101.318, down 2.089 or -2.02%.

To recap September, the USD/JPY hit its high for the month on September 2 at 104.316 as the U.S. reported its non-farm payrolls for August. The rally into a one-month high came in the wake of weaker than expected jobs date that came in at 151K versus a consensus forecast of 180K.

The jobs report triggered the start of a sell-off in the USD/JPY, leading to an eventual break to 100.071 on September. In between, there were a few price swings, but essentially, the Forex pair trended lower the entire month.

The weaker jobs report set in motion the sell-off because it reduced the odds of the Federal Reserve tightening at its September meeting. The jobs data was not the only report to raise concerns about the Fed’s ability to raise rates. There was also a surprisingly poor reading on U.S. manufacturing data. U.S. ISM Manufacturing missed estimates, coming in at 49.4 versus a forecast of 52 and a previous reading of 52.6 in July.

In domestic news, Final GDP surprised investors with a better-than-expected 0.2% read. Traders were looking for 0.0%.

As far as monetary policy is concerned, the Bank of Japan left its benchmark interest rate at negative 0.10 while overhauling its monetary policy strategy. The central bank made technical changes that give it more influence over long-term interest rates. It also said it will continue to try to stimulate the Japanese economy until inflation is higher than 2 percent a year.

The Fed left interest rates unchanged but left open the possibility of a December rate hike if the labor market remains strong.

FORECAST

monthly-usdjpy
Monthly USDJPY

The USD/JPY should continue to straddle the 100.00 level in October as long as there are no extraordinary events. Although most investors feel the Bank of Japan didn’t do enough to stimulate the economy or weaken the Japanese Yen, the currency is not expected to move much below par.

Demand for risk is one factor that should continue to prop up the USD/JPY. As long as global equity markets remain firm and near all-time highs, the Yen should stabilize or even weaken because it is a funding currency. When there is demand for risk, investors borrow from Japanese banks and use the proceeds to buy risky assets. In doing so, they have to sell the Japanese Yen.

Just like last month, the biggest influence on the USD/JPY early in the month will be the U.S. Non-Farm Payrolls report. Since the Fed said in its last statement that the strength of the labor market will help determine whether rates are increased in December, investors should pay close attention to this report. Early estimates indicate the economy added 171K jobs in September.

The direction of the USD/JPY will be dictated by the jobs report and risk aversion. A better-than-expected jobs report will bring the Fed closer to raising rates, which would be bullish for the USD/JPY. A strong stock market will also be supportive for the Forex pair.

The USD/JPY could feel the most downside pressure if the jobs report comes out weaker-than-expected and if stocks sell-off.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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