USD/JPY Fundamental Daily Forecast – Price Action Suggests Investors are Banking on Massive Fiscal Stimulus

Rising U.S. Treasury yields and firm demand for U.S. equities are helping to underpin the Dollar/Yen on Tuesday, an early sign that the recent aggressive moves by the U.S. Federal Reserve may be taking hold after yesterday’s debacle.

On Monday, investors reacted to another 50 basis point rate cut by the Fed as if the central bank had run out of tools to find a major liquidity issue in the financial markets. Treasury yields plunged and stocks plummeted. However, today’s early price action suggests cooler heads are prevailing.

At 10:46 GMT, the USD/JPY is trading 106.842, up 0.866 or +0.82%.

Despite the volatility in the bond and stock markets since Friday, the price action in the Dollar/Yen suggests more of a neutral tone. Straddling a key 50% level at 106.706 suggests traders may feel we are at a tipping point in the global economy. In other words, these massive injections by the central banks are either going to prevent a liquidity crunch, or the markets are going to seize up.

BOJ to Take Emergency Easing Measures

Policymakers at the Bank of Japan have announced measures to ease the impact of the coronavirus pandemic on the economy.

The BOJ met on Monday, two days ahead of schedule. The central bank will increase its purchases of exchange-traded funds from the current 6 trillion yen to 12 trillion yen a year, and it will double its acquisition of real estate investment funds to 180 billion yen per year.

The BOJ will also increase purchases of commercial paper and corporate bonds by one trillion yen each to increase cash flow to businesses.

Policymakers will also introduce a new lending scheme. The BOJ will offer interest-free loans to commercial financial institutions.

BOJ Governor Haruhiko Kuroda said, “The measures we’ve decided today will prop up economic and financial activities. Our decision is in line with steps taken by Japan and the governments and central banks of other countries in response to the virus.”

Daily Forecast

The early price action suggests investors are taking a “wait-and-sell” approach before choosing a direction for the USD/JPY.

The moves by the BOJ and the Fed this week are designed to have both short-term and long-term impacts on the financial markets.

One move is designed to flood the economy with enough cash to prevent a liquidity crisis, the other is expected to ease tensions over a possible global recession. The central banks acknowledge that the economy will take a hit and they can only do so much. This is the main reason why investors are banking on the United States to inject massive amounts of fiscal stimulus into the economy, Other major central banks are also hoping for similar moves by their own economies.

One thing is clear, monetary policy will be ineffective in this case unless it is accompanied by fiscal stimulus.