USD/JPY Fundamental Weekly Forecast – BOJ Expected to Maintain Policy Settings, May Discuss Tweaking 10-Year Yield Range

The Dollar/Yen fell last week as stock market volatility and lower Treasury yields helped make the Japanese Yen a more attractive investment.

The USD/JPY settled at 111.895, down 0.639 or -0.57%.

Demand for lower risk drove the USD/JPY lower last week as investors sought shelter from another week of losses in global stock markets as well as rapidly rising volatility. Several factors actually contributed to the wild swings in the equity markets including a few earnings disappointments, fear of rising interest rates, a simmering conflict between the European Union and the Italian government, Western criticism of oil power Saudi Arabia after the killing of dissident journalist Jamal Khashoggi, and worries about slowing global economic growth.

In Japan, All Industries Activity rose 0.5% versus a 0.4% estimate. The previous month was revised lower to -0.2%. Bank of Japan Core CPI was 0.5%, unchanged from the previous month. Tokyo Core CPI was 1.0% as expected. Flash Manufacturing PMI beat the estimate with a 53.1 reading, but the previous month was revised lower to 52.5.

In the U.S., Core Durable Goods Orders failed to impress with a 0.1% reading. Traders were looking for a 0.5% increase. Advance GDP came in higher-than-expected at 3.5% versus a 3.3% forecast and 4.2% reading at the end of the second quarter.

Additionally, the Commerce Department said the PCE price index, the Fed’s key measure of inflation, increased by 1.6 percent last quarter, much less than the 2.2 percent increase expected by economists.

A jump in consumer spending was the surprise of the day. Consumer spending, which accounts for more than two thirds of U.S. economic activity, grew by 4 percent in the third quarter, the strongest since the fourth quarter of 2014.

The surge in consumer spending was necessary to help overall GDP expansion because business spending declined 7.9 percent. This was the biggest quarterly decline in business spending since the first quarter of 2016.

Housing data also shook up traders with New Home Sales coming in at 553K versus a 627K forecast. The previous month was also revised lower to 585K.

Forecast

Investors will continue to react to stock market volatility this week, but they’ll also have to deal with several key economic events. Continued weakness in the equity markets will pressure the USD/JPY, but a stock market rally will trigger a short-covering rally on position-squaring and profit-taking after last week’s sell-off.

In Japan, early Wednesday, the primary focus will be on the Bank of Japan with the release of its interest rate decision and monetary policy statement. It is widely expected to leave interest rates unchanged while perhaps announcing a few tweaks to policy. Pressure is mounting for the central bank to further widen the movement range of its long-term yield target as a tightening step by the end of 2020. The BOJ will also release its Outlook Report and hold a press conference.

In the U.S., the first major piece of data is the Conference Board’s Consumer Confidence report, due to be released on Tuesday. It is expected to come in at 136.3, down from 138.4. On Thursday, ISM Manufacturing PMI is expected to dip slightly to 59.0 from 59.8.

On Friday, in the Non-Farm Payrolls report, the Non-Farm Employment Change is expected to show the economy added 191K jobs in October. The Unemployment Rate is expected to rise slightly from 3.7% to 3.8%. Average Hourly Earnings are estimated to have risen by 0.2%.