USD/JPY Fundamental Weekly Forecast – BOJ Gov Kuroda Could Hint at October Rate Cut

The Japanese Yen was one of two currencies to close higher against the U.S. Dollar last week. This trend is likely to continue because of uncertainties over U.S.-China trade relations, a potential escalation of tensions in the Middle East, the U.S. money market squeeze and the Fed’s rate cut.
James Hyerczyk

The Dollar/Yen closed lower for the first time in three weeks in reaction to several factors including mixed central bank decisions, lower Treasury yields and a drop in demand for higher risk assets. The primary catalysts behind the weakness are concerns over U.S.-China relations.

Early in the week, the biggest worry was an escalation of tensions between the United States and Iran, but the Forex pair recovered as that threat dissipated. However, late Friday, the Dollar/Yen collapsed when a low-level Chinese trade delegation cancelled a trip to U.S. farms and abruptly went down.

Last week, the USD/JPY settled at 107.561, down 0.528 or -0.49%.

Early Week Sell-off

Flight to safety demand jumped on September 16 following a weekend attack on Saudi production facilities. However, the Forex pair recovered by mid-week after Saudi officials promised to be back on line by the end of the month.

Bullish Initial Response to Fed Decisions

The Dollar/Yen hit its high for the week at 108.478 on September 18, following the release of the U.S. Federal Reserve interest rate and monetary policy decisions. The Fed cut its benchmark interest rate by 25-basis points as expected, but the vote was mixed, suggesting uncertainty over future rate cuts. Additionally, Fed Chair Jerome Powell once again said the rate cuts were insurance against a weakening economy. The uncertainty over future rate cuts was enough to provide support on the close.

Bank of Japan Leaves Rates Unchanged but Hints at Future Cuts

The BOJ kept monetary policy on hold but hinted at possible action in October. Policymakers held overnight interest rates at minus 0.1 percent, its target for 10-year bond yields at around zero percent, and the pace of its asset purchases at 80 trillion Yen ($740 billion) a year.

The BOJ’s board voted for the decision by a majority of 7-2, with the dissents coming from policymakers who wanted greater stimulus.

Central bankers also gave an explicit warning that it was concerned about risks to the economic recovery and promised a review at its next meeting, after Japan’s consumption tax rises from 8 percent to 10 percent at the end of this month.

“With the slowdown in overseas economies continuing and downside risks on the increase, we judged it’s becoming necessary to pay closer attention to the possibility of losing momentum towards our price stability goal,” said Haruhiko Kuroda, BOJ Governor, in a press conference after the decision.

“Bearing that in mind, we’ll re-examine trends in activity and prices at our next meeting, when we publish our economic outlook report.”

Late Session Stock Market Sell-off Drives Investors into Safe-Haven Yen

Stocks fell Friday on news that Chinese officials were cutting short their visit to the U.S., dampening hope around trade negotiations between the two countries. The unexpected move drove investors to seek shelter in safe-haven assets, pushing the USD/JPY lower into the close.

Weekly Forecast

The Japanese Yen was one of two currencies to close higher against the U.S. Dollar last week. This trend is likely to continue because of uncertainties over U.S.-China trade relations, a potential escalation of tensions in the Middle East, the U.S. money market squeeze and the Fed’s rate cut.

President Trump blurred the optimism over trade negotiations when he said he doesn’t want to make a partial deal with China. Furthermore, traders are likely to remain nervous ahead of the start of official high-level trade negotiations between the U.S. and China the first week of October.

Early Tuesday, traders will get a chance to react to a speech by BOJ Governor Kuroda. He may hint at a possible rate cut at the central bank’s October 31 policy meeting.

On September 26, the U.S. will report Final GDP and the Federal Open Market Committee will hold a press conference. On September 27, traders will get a chance to react to a reports on Core Durable Goods Orders and Personal.

Treasury yields and demand for risky assets will control the price action.

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