USD/JPY Fundamental Weekly Forecast – Bearish Trend if Risk-off Tone ContinuesThe direction of the USD/JPY will be determined this week by U.S. Treasury yields and appetite for risk. The catalyst impacting both factors will be U.S.-China and U.S.-Mexico trade relations as well as ISM Manufacturing PMI, a speech by Fed Chairman Jerome Powell, ISM Non-Manufacturing PMI, a speech by BOJ Governor Kuroda and the U.S. Non-Farm Payrolls report.
The Dollar/Yen finished sharply lower last week as a drop in demand for risky assets sent investors into the safety of the Japanese Yen. Lower Treasury yields also helped tighten the spread between U.S. Government bond yields and Japanese Government bond yields, making the U.S. Dollar a less-desirable asset.
Yields tumbled all week as investors continued to bet a slowing economy would lead to a Fed rate cut later in the year. The move actually helped weaken equity prices as investors shed stocks in anticipation of a weaker economy. Tension over U.S.-China trade relations limited gains early in the week, but President Trump’s vow to place a tariff on Mexican imports, contributed to financial market weakness late in the week.
The weakness on Friday is expected to set the tone early in the week in the financial markets as well as determine the early direction of the Dollar/Yen.
Last week, the USD/JPY settled at 108.291, down 1.004 or -0.92%.
The USD/JPY was steady most of the week on mixed economic data. The week started with a U.S. bank holiday and trade talks between U.S. President Trump and Japanese Prime Minster Shinzo Abe. Trump thought the talks went well and hinted that a deal could be completed in August. However, Japanese officials played down expectations for a fast deal.
U.S. housing data continued to weaken, while consumer sentiment was mixed. The Conference Board reported a jump in sentiment, while the University of Michigan reported a drop.
U.S. Preliminary GDP rose 3.1% as expected. However, the internals of the report indicated inflation fell during the first quarter, somewhat contradicting the Fed’s assessment that low inflation was “transitory”. April Core PCE Price Index rose 0.2%. Personal Spending and Personal Income beat their estimates.
All-in-all, it was a mixed week for the U.S.
In Japan, the big surprise was the 0.6% jump in Preliminary Industrial Production. Traders were looking for a 0.2% gain. The previous month was also revised higher to -0.6%.
On the bearish side, retail sales missed the forecast with a 0.5% gain. Housing Starts plunged 5.7%.
The direction of the USD/JPY will be determined this week by U.S. Treasury yields and appetite for risk.
The catalyst impacting both factors will be U.S.-China and U.S.-Mexico trade relations as well as ISM Manufacturing PMI, a speech by Fed Chairman Jerome Powell, ISM Non-Manufacturing PMI, a speech by BOJ Governor Kuroda and the U.S. Non-Farm Payrolls report.
With traders betting on a rate cut, they’re going to need support from the economic data to stay the course. In terms of a global economic slowdown, investors will be keying on Sunday’s Caixin Manufacturing PMI report from China. It is forecast at 50.0. The Dollar/Yen could tumble if the number comes in below 50.
In the U.S. on Monday, traders will get the opportunity to react to the ISM Manufacturing PMI. It is expected to come in at 53.0. The closer this number gets to 50.0, the more bearish for the Dollar/Yen. ISM Non-Manufacturing PMI on Wednesday is expected to come in at 55.6.
The major report is Friday’s U.S. Non-Farm Payrolls report. This report is important because the Fed is holding rates steady due a strong labor market and muted inflation. A bearish report will likely drive the USD/JPY lower.
Continue to look for heightened volatility, but keep in mind that all its going to take is for the U.S. and China to announce that trade talks are back on to turn the financial markets higher.