USD/JPY Fundamental Daily Forecast – Weaker as Fed Stimulus Dwarfs Japan’s Financial Aid Package

The Dollar/Yen drifted on Friday mostly due to thin holiday trading with most of the major financial centers closed for Good Friday. The general theme for the week was bearish with another stimulus measure by the U.S. Federal Reserve weighing the most on prices. Investors primarily ignored the surge in demand for risky assets which tends to support the Forex pair, instead choosing to react to the oversupply of U.S. Dollars in the market at this time.

On Friday, the USD/JPY settled at 108.411, down 0.088 or -0.08%.

Fed Brings in More Dollars

On Thursday, April 9, the U.S. Federal Reserve announced a massive new lending program for small companies.  The details of the program are not as important as to what it means to the U.S. Dollar and its relationship with other currencies.

The Fed has hit the financial markets and the U.S. economy with a number of programs since the beginning of March. The end result is a large increase in the supply of dollars.

This latest program is a $2.3 trillion offer of loans to local governments and small and mid-sized businesses and represent the latest step to backstop the U.S. economy as the country battles the coronavirus crisis.

In March, the Fed slashed interest rates to zero, restarted quantitative easing, and increased dollar liquidity to combat a shortage in money markets, leaving the dollar in the grip of bears in the spot market.

Japan Unveils Stimulus Package

Early last week, Japan unveiled a record 108.2 trillion yen ($992 billion) stimulus package to shield the economy from the coronavirus’ widening a Prime Minister Shinzo Abe declared a state of emergency.

The package’s size, with a headline figure equivalent to 20% of the nation’s annual economic output, highlights the magnitude of the damage that policy makers are bracing for. Japan’s economy faces its biggest crisis since the end of the Second World War, Abe told reporters Tuesday.

Do the Math

The size of last week’s Fed package was two times the size of Japan’s stimulus move. Put that on top of the other massive stimulus moves, both monetarily and fiscally, and you have a huge amount of dollars floating around the world.

If coronavirus cases continue to dip in key global hotspots then demand for higher risk assets should continue to rise and demand for the greenback should continue to weaken. This could be the normal response for several months so we’re not looking for investors to start selling Yen to buy stocks. Money is cheap all around the world and especially at home in the U.S. This reduces the need for the carry trade in my opinion.

I’ll probably change my bearish opinion about the USD/JPY if buyers overtake 109.884 with conviction. In the meantime, I’m looking for a minimum break to 106.706 to 106.450 over the near-term. Losses should start to steepen under this area.