USD/JPY Fundamental Forecast – October 18, 2016

The U.S. Dollar weakened against the Japanese Yen on Monday as investors reacted to the release of downbeat economic reports from the U.S. and as they continued to digest comments by Fed Chair Janet Yellen from Friday.

On Monday, the Empire State manufacturing index fell to -6.80 in October, missing the +1.1 estimate, and coming in worse than the previous -2.0 read.

The Capacity Utilization Rate was 75.4%, a little higher than the previous 75.3% read and a little lower than the 75.6% estimate.

Industrial Production also missed its forecast with a 0.1% read. This was below the 0.3% estimate, but better than the previous -0.5%.

FOMC Member and Federal Reserve Vice Chairman Stanley Fischer gave a speech at the Economic Club of New York, at which he warned that low rates can lead to longer and deeper recessions, making the economy more vulnerable.

The USD/JPY finished at 103.779, down 0.387 or -0.37%. Although the economic reports were disappointing, traders primarily reacted to comments made by Fed Chair Janet Yellen last Friday in which she suggested the Federal may allow inflation to run above target before raising interest rates.

Her statement helped drive down Treasury yields, weakening the dollar against the Japanese Yen. Lower equity markets also bolstered the Yen due to carry trade redemptions.

Forecast

Falling U.S. equity markets and declining U.S. Treasury rates could make the U.S. Dollar a less-desirable investment while enhancing the attractiveness of the Japanese Yen as a safer currency.

Yellen’s comments may help weaken Treasury yields and consequently the U.S. Dollar because she is essentially saying that the central bank may delay an interest rate hike to allow inflation to move above the 2.0% target.

She wasn’t clear, however, if this delay will include December. Rather than wait for a clarification, USD/JPY buyers the last couple of weeks, decided it was time to take profits and reduce their positions.

The key report on Tuesday that can move the markets is the U.S. Consumer Inflation report. Traders will be watching the numbers for indications on whether inflation is running hot enough to support a U.S. Federal Reserve rate hike sooner-rather-than-later.

The Fed wants to see inflation higher so a number below the 0.3% estimate could be disappointing and likely trigger a break by the USD/JPY.

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