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James Hyerczyk
USD/JPY
USD/JPY

The Dollar/Yen is trading higher for a second session on Tuesday, driven by a strong recovery in global equity markets and solid U.S. economic data from Monday. Yesterday, the Forex pair showed little reaction to an extremely volatile U.S. stock market session.

Two days ago, the Forex pair was pressing the downside and facing a potential steep decline, however, the rapid two-day recovery has placed the Dollar/Yen in a position to change the trend to up on the daily chart and potentially breakout to the upside.

At 0602 GMT, the USD/JPY is trading 112.657, up 0.275 or +0.25%.

Although the USD/JPY is seen as a safe haven currency during times of market stress, traders showed little reaction to Monday’s extreme stock market volatility. Perhaps investors are looking ahead to the Bank of Japan’s monetary policy meeting on Wednesday.

Traders expect the Bank of Japan to leave policy unchanged at its October 31 meeting. The BOJ’s policy board will likely revise down slightly its macro forecasts. However, it is not expected to begin raising rates for a considerably long time due to continued downside risks to growth and inflation.

In U.S. economic news on Monday, the Core PCE Price Index came in higher than expected at 0.2 percent. Traders were looking for 0.1 percent. Personal Spending came in as expected at 0.4 percent. However, Personal Income failed to meet expectations with a reading of 0.2 percent versus a 0.4 percent forecast.

The data showed that U.S. consumer spending rose for a seventh straight month in September, but income recorded its smallest gain in more than a year on moderate wage growth, suggesting the current pace of spending was unlikely to be sustained.

The report from the Commerce Department on Monday also showed the increase in income at the disposal of households was the smallest in 15 months and savings dropped to their lowest level since December last year. The data also suggests that stimulus from the Trump administration’s $1.5 trillion tax cut package may have peaked.

The personal consumption expenditures (PCE) price index left the year-on-year increase at 2.0 percent for a fifth straight month. It hit the U.S. central bank’s 2 percent inflation target in March for the first time since April 2012.

Early Tuesday, the Japanese government announced that the seasonally adjusted unemployment rate fell to 2.3 percent in September from 2.4 percent in August. However, investors said this news shouldn’t have much of an effect on Japanese stocks since many companies derive most of their earnings from overseas activities.

Forecast

The early price action on Tuesday suggests short-covering in the USD/JPY is taking place due to the strong recovery overnight in global equity markets. This is driving up demand for higher-risk assets, driving down demand for the safe-haven Japanese Yen.

The rally in the USD/JPY came about after a rally in the mainland Chinese stock market started after the country’s securities regulator said it would improve market liquidity and guide more long-term capital into the market. The China Securities Regulatory Commission turned the market higher after it said it will encourage share buybacks and mergers and acquisitions by listed firms, reduce unnecessary interference in trading, and create a level playing ground for investors.

Traders will also get the opportunity to react to U.S. data on S&P/CS Composite-20 HPI and Conference Board Consumer Confidence.

The daily chart indicates that the USD/JPY trend could change to up on a trade through 112.884. This could trigger a strong breakout to the upside if there is volume behind the move.

But volume could be suspect today ahead of Wednesday’s Bank of Japan monetary policy meeting.

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