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James Hyerczyk
USD/JPY

The Dollar/Yen inched lower on Friday while posting a second consecutive inside move. The price action suggests investor indecision and impending volatility. Fundamentally, it may mean it’s a toss-up between those who favor the U.S. Dollar for safe-haven protection and those who want to park their assets in the Japanese Yen for safety.

On Friday, the USD/JPY settled at 105.405, down 0.010 or -0.01%.

The tight price action on Friday reflected the tone for the week, whereby, the dollar and the Japanese Yen both posted weekly gains against the major currencies as investor appetite for safe-haven assets, or 0.7% and 0.4% respectively.

Driving investors into the safe-haven currencies was growing market caution over a global surge in coronavirus cases and fading prospects of a U.S. stimulus package before the November 3 election.

Meanwhile, fresh curbs to combat COVID-19 have been introduced across Europe while the U.S. Midwest is also battling record spikes in new cases as data shows the country’s economic recovery is losing steam, Reuters wrote.

US Retail Sales Improved in September

The government reported on Friday that U.S. retail sales accelerated in September, rounding out a strong quarter of economic activity, Reuters reported.

Retail sales jumped 1.9% last month as consumers bought motor vehicles and clothing, dined out and splashed out on hobbies. That followed an unrevised 0.6% increase in August.

Economists polled by Reuters had forecast retail sales would rise 0.7% in September. Some said September’s surge was likely exaggerated by difficulties stripping seasonal fluctuations from the data after the shock caused by COVID-19. Unadjusted retail sales fell 2.8% after dropping 1.0% in August.

Excluding automobiles, gasoline, building materials and food services, sales increased 1.4% last month after a downwardly revised 0.3% drop in August.

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US Industrial Output Declines Unexpectedly in September

Industrial Production fell for the first time in five months in September, surprising economists who had expected more steady growth from the factory sector. Industrial output fell 0.6% in September, the first decline after four straight months of gains, the Federal Reserve reported Friday. The decline was well below Wall Street expectations of a 0.4% gain, according to a survey by MarketWatch.

Short-Term Outlook

We expect the FX markets to continue to be dominated by risk considerations, which means the U.S. Dollar and Japanese Yen are likely to maintain their safe-haven appeal.

The direction of the global equity markets could ultimately determine the next substantial move in the USD/JPY. Last week, the inability to reach a fiscal stimulus package seemed to give the USD/JPY a boost, while weakness in the equity markets pressured the Dollar/Yen. We expect these reactions to continue over the short-run.

With the chances of a stimulus deal by November 3 are nearly impossible, we think the price action in the USD/JPY is likely to be largely influenced by demand for riskier assets over the near-term.

For a look at all of today’s economic events, check out our economic calendar.

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