USD/JPY Fundamental Daily Forecast – Outcome of Trade Talks Likely to Determine BOJ’s Next Move

With the central bank moves behind us, the focus will shift to the trade talks and their outcome will determine the next major decisions by the BOJ and the Fed, in my opinion.
James Hyerczyk

The Dollar/Yen is trading lower on Thursday as traders respond to the U.S. Federal Reserve’s rate widely expected rate cut and the Bank of Japan’s decision to keep policy on hold. The price action comes as no surprise since the moves tightened the spread between U.S. government bond yields and Japanese government bond yields, making the Japanese Yen a more attractive currency at least temporarily.

At 08:53 GMT, the USD/JPY is trading 108.011, down 0.440 or -0.41%.

Today’s price action is primarily about the interest rate differential and future central bank policy. This may go on for a few days then the Japanese Yen will resume its reaction to demand for risky assets. This will ultimately be determined by how well the trade talks between the United States and China go. If progress is made toward an eventual deal to end the prolonged trade dispute, the dollar/yen is likely to rise. Another stalemate will likely make the yen a highly desirable safe-haven asset.

Central Bank News

On Wednesday (US Time), the U.S. Federal Reserve cut its overnight rate by 25 basis points to a range of 1.75% to 2%, a move that was widely expected. Central bank policymakers, however, appeared divided on further action for the year.

Early Thursday, the Bank of Japan (BOJ) kept monetary policy steady also in an expected move. The BOJ maintained its short-term interest rate target at -0.1% and a pledge to guide 10-year government bond yields around 0%.

BOJ Statement

In its statement on monetary policy, the Japanese bank said “it is becoming necessary to pay closer attention to the possibility that the momentum toward achieving the price stability target will be lost,” in reference to the BOJ’s ever elusive 2% inflation target.

“The Bank will reexamine economic and price developments at the next (Monetary Policy Meeting), when it updates the outlook for economic activity and prices,” the BOJ said.

Daily Forecast

The price action over the past several months indicates that Japanese Yen investors have been more sensitive or reactive to tweets from President Trump than they have been to policy moves by the BOJ. In late July when the BOJ left rates unchanged, the Yen weakened against the dollar, only to strengthen after Trump announced more tariffs against China.

Then the Yen weakened again in early September when China and the U.S. announced the resumption of trade talks in early October. With the central bank moves behind us, the focus will shift to the trade talks and their outcome will determine the next major decisions by the BOJ and the Fed, in my opinion.

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