USD/JPY Fundamental Analysis – Forecast for the week of August 15, 2016

The USD/JPY was active on Friday falling from close to 102 to close the week at 101.27 and the pair remans a strong buy moving into the new week. The pair dipped 0.53% for the week and is down 3.86% for the month. The greenback rose as high as 102.66 yen on last Monday following Friday’s strong U.S. jobs data, but has since lost momentum after weak productivity report meant inflation pressures are likely to be tame.

The Japanese Yen has been quite the volatile currency of recent. After the Brexit referendum drove the Yen to fresh highs as risk aversion permeated through global markets, a two-week bout of weakness in the currency threatened to pose a longer-term reversal on the prospect of an even more enhanced stimulus package coming out of the Bank of Japan. But when the BoJ disappointed in July, and later when the Japanese Government Budget indicated far less fiscal stimulus than originally hoped, those bets of Yen-weakness priced out of the market aggressively, driving the Yen towards the highs established in the Post-Brexit environment.

To be sure, there is one key driver here for Japanese Markets: Anticipation of stimulus.

The Japanese yen continues to have a quiet week and has posted small losses in the Tuesday session. In the North American session, USD/JPY is currently trading at the 102 line. On the release front, Japanese Preliminary Machine Tool Orders posted another sharp decline. Later in the day, Japan releases the Producer Price Index, which measures inflation in the manufacturing sector. The markets are braced for a sharp decline of 4.0%. In the US, there are no major events on the schedule. Preliminary Unit Labor Costs declined 0.5%, while Preliminary Nonfarm Productivity posted a gain of 2.0%.

The Japanese current account surplus jumped to JPY 1.65 trillion in June, up from JPY 1.45 trillion a month earlier. This figure beat the forecast of JPY 1.60 trillion and marked a 3-month high. If the yen continues to strengthen, however, we could see lower surpluses. Last week, Prime Minister Shinzo Abe’s cabinet approved a JPY 28 trillion stimulus plan, and the yen posted some gains before retracting. The package includes JPY 13.5 trillion of fiscal measures, with new spending to commence this year.

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