USD/JPY Fundamental Weekly Forecast – Carry Trade, Safe-Haven Moves Will Drive Price Action

The Dollar/Yen finished lower last week despite an attempt by bullish investors to trigger a breakout to the upside. The Forex pair was pressured by lower U.S. Treasury yields. They fell on flight-to-safety buying due to global equity market weakness fueled by trade war concerns. Steep losses in global equity markets also drove investors into the safe haven Japanese Yen.

The USD/JPY settled the week at 109.986, down 0.676 or -0.61%

The Bank of Japan released the minutes from its April monetary policy meeting last week. The minutes showed a lone BOJ policymaker said additional easing was needed to accelerate inflation, but most members wanted to keep monetary policy unchanged.

The minutes also showed that no board member submitted a formal proposal for additional easing at the meeting in April, although one member advocated speeding up the economy by taking additional easing measures to boost inflation expectations.

Looking ahead, the BOJ may lower its forecasts for consumer price growth at its next meeting in July but is likely to keep monetary policy on hold.

Forecast

U.S. and Japanese economic data aside, USD/JPY investors are likely to focus on two markets this week for direction:  U.S. equity markets and U.S. Treasurys.

Long-term, the trend is bullish because of the divergence between the hawkish U.S. Federal Reserve and the dovish Bank of Japan. Over the short-run, however, investors are likely to shake up the long-term bulls a little because their concerns over a possible trade war between the United States and China are pressuring stocks and driving up demand for safe haven assets like Treasurys and the Japanese Yen.

Investors are reducing their positions in stocks and using the proceeds to pay back loans in Japanese Yen. This is known as the carry trade. Furthermore, when investors buy Treasurys for protection, this drives down yields. When yields fall, the U.S. Dollar becomes a less-desirable investment.

If the dollar happens to rise even as stocks weaken and rates drop, then this means that longer-term investors believe that a trade war will lead to increased inflation and more aggressive rate hikes by the Fed.

The conflict between short-term and long-term fundamental traders is likely to create volatility in the Dollar/Yen market this week.

There are no major reports from Japan this week. In the U.S., investors will get the opportunity to react to reports on U.S. Consumer Confidence, U.S. Durable Goods and U.S. Final GDP.