USD/JPY Fundamental Forecast – July 29. 2016

The USD/JPY eased 56 points to 104.83 as the greenback declined after the FOMC statement which indicated that the Fed was back on course to increase rates before the end of the year. Traders are preparing for the Bank of Japan stimulus program on Friday which will be followed by additional fiscal stimulus from the government. The Fed’s most recent economic projections show growth leveling off this year at 2 percent and remaining there for the foreseeable future. That, in turn, has pushed down the central bank’s estimates of how high it will raise interest rates and how quickly it will do so. Speaking to reporters last month, Fed Chair Janet L. Yellen acknowledged that slow growth and low interest rates might be the United States’ “new normal.”

“The Fed is coming to realize that the U.S. economy is a plane that is flying more slowly and closer to the ground, and it has to reset its expectations for what it can deliver,” said Vincent Reinhart, chief economist for Standish Mellon Asset Management and formerly a senior official at the central bank.

Attention also quickly turned back to whether the BOJ will disappoint investors hoping for a large stimulus announcement when it concludes its meeting on Friday. The prospect of more stimulus in Japan has overshadowed the Fed meeting this week.

“Yen is probably the only story we’ve had for the past week-and-a-half or so,” said Mark McCormick, North American head of fx strategy at TD Securities in Toronto.

“We have some headlines that the stimulus could be a little bit higher than people had been anticipating, and that’s been dovetailing with what the expectations are around the BOJ,” McCormick said.

The yen weakened earlier on Wednesday after Japan’s prime minister unveiled a surprisingly large $265 billion stimulus package to reflate the world’s third-largest economy. The size of the Japanese package, at more than 28 trillion yen ($265.30 billion), exceeded initial estimates of around 20 trillion yen.

It will also add pressure on the BOJ to match the measures with monetary stimulus on Friday.

Japan’s Ministry of Finance also denied a report by the Wall Street Journal on Wednesday that it is considering issuing 50-year bonds for the first time to capitalize on ultra-low interest rates.

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Friday, July 29, 2016

Government Bond Auctions

Date/Time Country Type

Jul 27 11:30 Germany Eur 1bn 2.5% Aug 2046 Bund

Jul 28 11:10 Italy Holds bond auction