USD/JPY Fundamental Daily Forecast – Fed Balance Sheet Discussions Will Create Volatility

The Dollar/Yen is trading higher despite a dip in U.S. Treasury yields and flat U.S. equity markets. Weaker-than-expected economic data earlier today and dovish comments from the Bank of Japan chief is helping to underpin the Forex pair. The early price action suggests investors remained cautious ahead of the Federal Reserve’s monetary policy meeting minutes later in the session at 19:00 GMT.

At 08:26 GMT, the USD/JPY is trading 110.853, up 0.247 or +0.22%.

U.S. Treasury Yields

The benchmark 10-year U.S. Treasury yield fell sharply to an 11-day low on Tuesday ahead of the Fed meeting minutes. This usually tightens the spread between U.S. Government bond yields and Japanese Government bond yields, making the Japanese Yen a more attractive investment. However, this wasn’t the case on Tuesday because dovish comments from BOJ Governor Kuroda and the weak trade balance data drove investors out of the Japanese Yen and into the U.S. Dollar.

Japan Trade Balance

Japan’s exports posted their biggest decline in more than two years as China-bound shipments tumbled, fueling concerns about slowing global demand as the business mood sours and orders for the country’s machinery good fell sharply.

Ministry of Finance data out on Wednesday showed Japan’s exports fell 8.4 percent year-on-year in January, a bigger decline than the 5.5 percent fall expected by economists in a Reuters poll.

It was the sharpest annual decline since October 2016, and followed a revised 3.9 percent year-on-year drop last December.

Bottom Line:  China’s economic slowdown and its lingering trade dispute with the United States is causing global trade to stall as well as the global economy. If Japan can’t count on strong exports then its growth will stall this year.

BOJ Gov. Kuroda Talks Up More Stimulus

On Tuesday, BOJ Governor Haruhiko Kuroda said the central bank was ready to ramp up stimulus if sharp Japanese Yen increases hurt the economy. Traders responded accordingly by driving up the USD/JPY. The question is, was Kuroda serious about ramping up stimulus, or was he just trying to weaken the Yen with his comments?

U.S. Federal Reserve Meeting Minutes

Based on the dovish comments from Fed Chairman Jerome Powell and the other policymakers, traders have reason to believe that the Fed is going to pause raising interest rates, however, they are less certain about what the central bank is going to do with the $4 trillion of bonds left on its balance sheet.

In the minutes, traders will be looking for clues as to what the central bank plans to do to affect the balance sheet. Continuing to reduce the balance sheet is a form of tightening. This could underpin the Dollar/Yen. However, the USD/JPY could tumble if the minutes show policymakers discussed stopping the reduction of its balance sheet.