USD/JPY Fundamental Daily Forecast – Could Weaken into Close on Weekend Coronavirus Worries

Conditions could change late in the session as investors decide whether to hold risky stock positions over the weekend.
James Hyerczyk

The Dollar/Yen is trading higher on Friday, driven by renewed demand for risky assets, following three days of long-liquidation and heavy selling. The Forex pair has been pressured recently by fears of the China coronavirus spreading, with the death toll rising to 25 and the number of confirmed cases increasing to 830. The virus originated in China, but cases have also been reported in the U.S., Japan and South Korea.

At 10:42 GMT, the USD/JPY is trading 109.562, up 0.084 or +0.08%.

Comments from the World Health Organization (WHO) on Thursday helped turn the USD/JPY around when it said the outbreak is an “emergency in China,” but stopped short of saying it constituted a global public health emergency.

Bank of Japan Monetary Policy Minutes

Some Bank of Japan policymakers warned that global uncertainties and last year’s sales tax hike may have hurt capital spending and inflation expectations, minutes of the central bank’s December rate review showed on Friday, as reported by Reuters.

One member said the BOJ might need to ramp up stimulus depending on how much damage the tax hike inflicts on private consumption, the minutes showed.

Such calls for more stimulus are unlikely to materialize any time soon, as the minutes showed others in the board fretting over the rising cost of prolonged easing such as the strain ultra-low interest rates is imposing on commercial banks.

But the gloomy view on the economic outlook underscores market expectations that soft inflation would force the BOJ to maintain its ultra-loose policy for the time being.

“Considering the risk that overseas economies could recover only to a small extent or slow further, the outlook for exports could not be viewed optimistically,” a few in the nine-member board was quoted as saying.

At the December meeting, the BOJ kept monetary policy steady but its Governor Haruhiko Kuroda warned that risks to Japan’s economic recovery remained high.

While the BOJ concluded that public perceptions of long-term price moves were holding up, a few members said households’ short-term inflation expectations had declined since last October’s sales tax hike, the minutes showed.

Some also voiced concern that households’ income may fall as manufacturers, hit by slowing global demand and the fallout from the U.S.-China trade war, could slash winter bonus payments.

“Close attention should be paid to how developments in corporate profits… would affect winter bonuses,” the minutes quoted them as saying.

Some also said it was a “matter of concern” that leading indicators of capital expenditure – a rare bright spot in the economy – was showing signs of weakness, the minutes showed.

Japan’s economy ground to a near halt in July-September and is likely to have contracted in the final quarter of last year as global trade tensions knocked exports. BOJ officials are counting on a rebound in global growth that would underpin the export-reliant economy.

Daily Forecast

Risk appetite will continue to drive the price action in the USD/JPY. Although the Dollar/Yen is trading higher early Friday, conditions could change late in the session as investors decide whether to hold risky stock positions over the weekend.

Heavy stock market selling pressure late Friday could drive investors into the safe-haven Japanese Yen late in the session.

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