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USD/JPY Fundamental Forecast – September 30, 2016

By:
James Hyerczyk
Updated: Sep 30, 2016, 12:07 UTC

The USD/JPY is trading slightly higher at 101.158, up 0.128, or +0.13%. However, the buying from the last two days appears to be weakening because of U.S.

japanese-yen-symbol

The USD/JPY is trading slightly higher at 101.158, up 0.128, or +0.13%. However, the buying from the last two days appears to be weakening because of U.S. stock market weakness. Since the Japanese Yen is a funding currency, any weakness in the equity markets is likely to encourage investors to pay back their loans to Japanese banks. This means they will have to buy Yen to accomplish this.

Essentially, it is safe haven buying that is pushing the USD/JPY lower. Global equity markets are trading weaker on Friday due to concerns over the financial health of Germany’s Deutsche Bank. This is helping to undermine risk which is making the Japanese Yen a more attractive place to park assets during these risky times.

To recap the situation with Deutsche Bank, shares of the bank have broken sharply this week under pressure from a massive fine imposed by the United States over its sales of mortgage-backed securities.

daily-usdjpy

Because of questions over its ability to pay the fine, global investors have been selling its shares, putting pressure on stock indices all over the world because of its drag on banking sector stocks.

The problems at the bank are being compounded by reports that a number of hedge funds that clear derivatives trades with Deutsche had withdrawn some excess cash held at the lender, which has caused it to drop to fourth in overall rankings as a currency traders. So not only are investors questioning its capitalization, they are also expressing concerns over its ability to turn a profit.

The quarter is expected to end today with the Japanese Yen expected to post its third consecutive quarter of gains. Right now, it is on track to earn about 2 percent this quarter. Most of the buying has come from speculators betting the Bank of Japan has run out of ways to stimulate the economy and weaken the Yen.

The USD/JPY has firmed this week in a move that some attribute to a stronger stock market, but the downtrend could easily resume if the Deutsche Bank problems encourage investors to pare some of their risky assets.

Later today, investors will get the opportunity to react to the PCE deflator – the Fed’s favorite inflation gauge. This could move the dollar because a strong number will bring the Fed closer to raising rates. However, based on the early price action, the main focus will be on the stock markets and whether they can recover from earlier weakness. We haven’t seen panic selling yet, but this could easily start late in the session if investors raise concerns about holding assets over the week-end due to capitalization concerns over Deutsche Bank.

Look for the USD/JPY to hold its earlier gains if stocks remain steady, but be prepared for a sharp rise in the Japanese Yen if U.S. stock markets start to break sharply.

 

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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