USD/JPY Fundamental Analysis – Forecast for the Week of September 26, 2016

The Japanese Yen rose sharply last week, mostly in reaction to a disappointing proposal by the Bank of Japan and a less-hawkish U.S. Federal Reserve. The USD/JPY finished the week at 100.971, down 1.285 or -1.26%.

On September 21, the Bank of Japan announced it would change policy, abandoning its monetary policy base target in favor of targeting the yield curve for Japanese bods. It also held the deposit rate unchanged at -0.1 percent and said it would maintain its program of bond purchases.

The decision by the BOJ indicates that it acknowledges that its negative interest rate strategy is not working. With the new action, Japanese policymakers appear to be focusing their attention on targeting the shape of the yield curve in order to take the pressure off banks, which had been struggling with the negative interest rate scenario. The flatter yield curve had been taking its toll on bank profitability.

The BOJ decision was followed by the U.S. Federal Reserve’s decision to leave interest rates unchanged. However, it did hint that a rate hike is possible in December. The Fed also lowered its expectations for the economy while reducing the number of future interest rate hikes.

FORECAST

After rallying initially in response to the BOJ decision, the USD/JPY broke sharply, finding support at 100.88, slightly above previous main bottoms at 99.506 and 98.887. The price action indicates that investors were disappointed with the BOJ’s decision. While it may have been beneficial to the banks because it did not move negative interest rates lower, it didn’t provide the firepower to improve the economy.

At the end of the week, traders felt that the BOJ’s new stimulus package shows how little flexibility the central bank has, given how experimental policy is now becoming. This also likely means that traders will have a hard time holding the USD/JPY over the psychological 100.00 level which is out target this week.

The USD/JPY also did not get much help from the Fed because it offered a less-hawkish assessment about the direction of interest rates and the economy as expected.

Unless this week’s U.S. economic data surprises dramatically, it looks as if investors are going to have to wait until October 8 when the U.S. releases its next report on the labor market.

It’s going to be a fairly active week for economic data. The major U.S. reports include the Conference Board’s Consumer Confidence report on Tuesday. Wednesday will feature the Core Durable Goods report and testimony from Fed Chair Janet Yellen. Final GDP is due out on Thursday. Yellen rounds out the week with a speech on Thursday.

In Japan, the week starts with the Bank of Japan Monetary Policy Meeting Minutes. Later in the week, we’ll get info on Japanese retail sales, consumer inflation and household spending. BOJ Governor Kuroda is also scheduled to speak on Thursday.

Several Fed speakers are also on tap this week to deliver commentary including Fed Chair Janet Yellen. The speaking schedule appears to be balanced between the hawkish and dovish Fed members so there is a strong possibility of wild two-sided trading, depending on how strong each FOMC member comes out to support their position on the direction of interest rates.

Finally, traders should also watch for a reaction to the U.S. presidential debates which should provide firepower early during the Asian sessions on Monday. The reaction from traders at this time is unpredictable so prepare for increased volatility.