USD/JPY Fundamental Forecast – September 29, 2016

Increased demand for higher risk assets helped weaken the Japanese Yen on Wednesday, allowing the USD/JPY to post a gain of 0.257, or +0.26% with a close at 100.67. Since it is a funding currency, the Yen tends to weaken when investors are demanding risk. This is because investors borrow Yen at low interest rates in Japan and invest the proceeds in the U.S. markets. In doing so, they have to sell the Yen and buy the dollar.

The catalyst behind the increased demand for stocks and commodity-linked currencies was a report that OPEC had agreed to reduce its oil output. The deal that Reuters is reporting marked the first time the group cut its oil output since 2008. Two sources in OPEC said the cartel would reduce output to 32.5 million barrels per day from current production of 33.24 million bpd.

The USD/USD actually started to firm early in the session after a broad-based recovery in European equity markets boosted investor risk appetite, driving them away from the perceived safety of the Japanese Yen. The Forex pair benefitted from the widespread risk-on sentiment after the OPEC deal sent U.S. stock markets soaring.

The U.S. markets were dominated Fed speakers and a durable goods report. Core Durable Goods Orders fell 0.4% in August, less than the minus 0.5% and well below the July reading of 1.3%. Durable Goods Orders were flat, slightly better than the minus 1 estimate and well below the 3.6% July number.

The good news was new orders for non-military U.S. capital goods other than aircraft rose for a third straight month in August, a positive signal for the business investment outlook.

FORECAST

The driving force in the market today will once again be increased investor risk appetite. The deal to cut production by OPEC and non-OPEC producers is big news and it should support higher demand for stocks and commodity-linked currencies over the near-term. This should also continue to underpin the USD/JPY. We’ll know more about the strength of the buying by how investors react to 101.24 since this is likely the trigger point for a fresh round of short-covering.

Later today at 2350 GMT, Japan will release its latest data on annual retail sales. This report is expected to show a decline of 1.7%, worse than the previous minus 0.2 read.

At 0635 GMT, Bank of Japan Governor Kuroda is scheduled to speak, however, he is not expected to reveal anything new. Japanese Yen traders are already gearing up for Friday’s slew of reports including Household Spending, Core CPI, Unemployment, a BOJ Summary of Opinions and Preliminary Industrial Production.

Before we get to the data from Japan on Friday, investors will have the opportunity to react to a gauntlet of U.S. data including the Final GDP, which is expected to come in at 1.3%. Pending Home Sales are also on-tap along with the Weekly Unemployment Claims report. FOMC Member Powell Speaks as well as Fed Chair Janet Yellen, for a second consecutive day.

Despite the plethora of economic data, I don’t think the euphoria from the OPEC deal is going to take a backseat to anything. This likely means the direction of the USD/JPY on Thursday will largely be determined by the strength in the buying of higher risk assets. If the buying spree continues in the stock market then look for the U.S. Dollar to continue to post gains against the Japanese Yen.