USD/JPY Fundamental Forecast – September 28, 2016

The Japanese Yen had a volatile session on Tuesday, posting a two-sided trade before settling slight lower against the U.S. Dollar. After the volatile session, the USD/JPY managed to eke out a small gain, finishing at 100.413, up 0.107 or +0.11%.

Increased demand for higher-yielding assets was behind the dollar’s strength and the yen’s weakness on Tuesday. Most of the selling pressure against the Japanese currency was attributed to its status as a funding currency. When there is demand for risk, investors like to borrow in Yen and buy U.S. equities. This puts pressure on the Yen because the investors have to sell it in order to invest in the U.S. stock market.

The “risk-on” rally began during the U.S. presidential debates and continued shortly afterwards after market participants deemed Democratic candidate Hillary Clinton’s performance in the first presidential debate superior to that of Republican candidate Donald Trump.

Investors were relieved that Clinton performed better than Trump and sought risky assets in celebration. This included the U.S. Dollar and stocks. The markets see Clinton as the candidate of the status quo, so anytime she performs well in debates or the polls, investors see that a positive develop for higher-yielding assets.

Traders downplayed strong U.S. economic news and focused on the strength of the U.S. equity markets. U.S. consumer confidence figures rose to 104.1 – the highest level since mid-2007. It was the second straight surprise increase which may be a signal that the U.S. consumer is not be affected by the U.S. presidential elections.

Additionally, another report showed that the proportion of people believing jobs are “plentiful” also rose to a nine-year high, which offset the weakness in recent ISM surveys.

FORECAST

There are no economic releases from Japan early Wednesday, but there will be plenty of items from the U.S. that could affect the volatility and direction of the USD/JPY. Therefore, I’m looking for a tight trading session during the Tokyo trade with the likelihood of a much wider trader range once the U.S. trading session becomes active.

After reacting to the presidential debate on Tuesday, investors will shift their attention to commentary from U.S. Federal Reserve officials, including an appearance by Fed Chair Janet Yellen, before a House of Representatives panel on supervision and regulation. Investors want to know her views after the split FOMC vote on September 21 and get a feeling as to how close the Fed is to raising rates in December.

Several Fed speakers are on tap to deliver their messages, too.  FOMC voters Mester (hawk, dissenter), George (hawk, dissenter), and James Bullard are all capable of moving the markets with their commentary. Traders should be looking for increased volatility especially if the Fed members comment on the timing of the next rate hike.

Other events on Wednesday include the U.S. Durable Goods Orders report. Core Durable Goods Orders are expected to fall 0.5% versus a 1.3% increase last month. Durable Goods Orders are forecast to fall by 1.0% versus a 4.4% increase. This report is due to be released at 1230 GMT.

Following the durable goods report, Yellen is scheduled to testify at 1400 GMT, followed by FOMC Member James Bullard at 1410 GMT. European Central Bank President will also deliver a speech at 1430 GMT. The day wraps up with a late speech by FOMC Member Esther George at 2315 GMT on Wednesday.

The USD/JPY could strengthen further during the U.S. session if the Fed speakers come off as more hawkish than expected. However, gains could be limited if hawkish commentary leads to sharp break in U.S. equity markets.