USD/JPY Fundamental Forecast – September 26, 2016

Japanese Yen investors expressed disappointment with last week’s decision by the Bank of Japan to overhaul its monetary policy. The initial reaction to the central bank’s new plan produced a volatile two-sided reaction before investors decided that it proposed nothing that could help the economy or weaken the currency.

The news drove the Japanese Yen sharply higher on September 21, but by September 23, the U.S. Dollar had already begun to claw-back some of its earlier losses. On Friday, the USD/JPY closed at 100.971, up 0.211 or +0.21%. However, it still finished 1.26% lower for the week.

Also helping to weaken the USD/JPY was a less-hawkish U.S. Federal Reserve Monetary Policy Statement and interest rate decision. The Fed decided that September was not the appropriate time to raise interest rates, but left open the door for a potential rate hike in December.

The possibility to raise rates was announced in unconvincing fashion since at the end of the week, traders had priced in about at 50/50 chance for a rate hike by the end of the year.

Also weighing on the dollar was the Fed’s lowering of its expectations for economic growth and the reduction of the number of rate hikes in the future. Both decisions tended to paint a weak picture of the U.S. economy going forward. Something that could keep a lid on the U.S. Dollar appreciation over the near-term.

Since there was nothing on the economic front on Friday to change investor sentiment, we have to conclude that most of the price action was tied to technical analysis factors or even simple position-squaring ahead of this week’s presidential debate, U.S. economic data and a fresh round of Fedspeak.

FORECAST

In the absence of fresh economic data from Japan on Monday, the price action today is likely to be determined by U.S. New Home Sales data, but more potentially from FOMC Daniel Tarullo. The effects of the presidential debate and the BOJ monetary policy meeting minutes are going to be felt on Tuesday.

U.S. New Home Sales will be watched closely on Monday at 1400 GMT but it isn’t likely to be a market moving event. They are expected to show the economy added 598K new units in August versus 654K units the month before.

At 1545 GMT, Governor Daniel Tarullo, who oversees the Fed’s efforts to supervise and regulate banks, will deliver a speech entitled “Next Steps in the Evolution of Stress Testing.” This speech is coming about four months after he said the largest U.S. banks will have to maintain more capital to survive future stress tests.

This may not be the proper setting for comments about the economy, but if Tarullo does say something, it will probably be along the lines of he wants to see more evidence of sustained inflation before considering an interest rate increase.

Given the price action on Friday and the lack of fresh economic data, I have to believe we’ll see an upside bias as shorts continue to take profits and pare positions ahead of the U.S. presidential debate and the BOJ minutes.