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James Hyerczyk
JPY Notes

The Dollar/Yen is trading lower on Tuesday after an attempted breakout to the upside earlier in the session failed to attract enough buyers to sustain the move. The price action doesn’t suggest any major shifts in investor sentiment. It probably is being fueled by position-squaring ahead of the start of the U.S. Federal Reserve’s two-day meeting later today. Furthermore, investors are also making adjustments ahead of the start of the Bank of Japan’s two-day meeting on Wednesday.

At 08:33 GMT, the USD/JPY is trading 108.859, down 0.102 or -0.09%.

The “position-squaring” theme is also being felt in the Treasury and stock markets early Tuesday with yields dipping slightly and investors trimming positions in stocks after the benchmark S&P 500 Index hit a new record high.

Federal Reserve

The U.S. Federal Reserve is widely expected to cut its benchmark interest rate 25-basis points on October 30. In addition to the cut, policymakers are expected to signal its intentions about future rate cuts. Financial market traders are pricing in a rate cut for this week, then a pause, followed by a rate cut for next year.

The rate cut forecast is what’s likely to drive the near-term action in the USD/JPY. It’s also going to be the source of volatility. Many economists do not expect the Fed to keep on cutting, as some market pros expect it to. After Wednesday’s meeting, there will be no new economic or interest rate forecast from the Fed, so its communications will be limited to the post-meeting statement and comments from Fed Chairman Jerome Powell at his press briefing.

Volatility seems to rise when the market has to interpret Powell. Sometimes he has trouble expressing his thoughts. Essentially, the direction of the USD/JPY the rest of the week will hinge upon whether the Fed hints at a December rate cut or not. If they are dovish then the Dollar/Yen is likely to weaken initially. A hawkish Fed, however, will likely be bullish for the Forex pair.


Bank of Japan

Watching the weak price action in the Japanese Government Bonds (JGB), it looks as if investors are reducing expectations that the Bank of Japan will cut interest rates this week. Rising hopes of a U.S.-China trade deal are also weighing on prices.

Daily Forecast

Traders are locked in on the Fed and the BOJ so today’s economic reports are likely to have little impact on the currencies. Most of the price action will be generated by trader reaction to stocks and Treasury yields. I don’t expect anyone to “rock the boat” unless there is an announcement about the trade deal.

At 13:00 GMT, the S&P/CS Composite-20 HPI is expected to come in at 2.1%, up slightly from 2.0%. The slight rise in home prices is likely reflecting the dip in mortgage rates.

At 14:00 GMT, the Conference Board Consumer Confidence Index is expected to rise from 125.1 to 128.2. This move suggests optimism over a trade deal. Pending Home Sales are expected to show a 0.9% dip.

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