USD/JPY Fundamental Weekly Forecast – Consolidation Possible as Traders Await Trade Deal News

The Dollar/Yen closed higher last week with the buying driven by higher Treasury yields and a rising stock market. The catalysts behind the strength were optimism over a U.S.-China trade deal and a strong U.S. economy. News from Japan continued to point toward a weakening economy and the possibility of further easing from the Bank of Japan.

Last week, the USD/JPY settled at 109.509, up 0.857 or +0.79%.

If investors were nervous about the lack of concrete evidence that the U.S. and China were making progress toward a trade deal, it’s didn’t show up in the financial markets last week. U.S. stock market futures hit record highs and Treasury yields inched higher.

Throughout the week, traders were closely monitoring U.S. and China relations ahead of a December 15 deadline for a fresh round of U.S. tariffs on Chinese goods. Additionally, China’s foreign ministry has claimed the U.S. has “sinister intentions” after President Donald Trump signed legislation supporting protesters in Hong Kong.

Japan Economic News

On Thursday, Japan reported a 7.1% drop in Retail Sales. This followed a 9.2% gain the previous month. Traders were anticipating a decline of 3.8%. Japan’s Retail Sales tumbled at their fastest pace in more than 4-1/2 years in October as a sales tax hike prompted consumers to cut spending, raising a red flag over the strength of domestic demand.

On Friday, Tokyo Core CPI came in at 0.6%, matching expectations. The Unemployment Rate was 2.4%, unchanged. Preliminary Industrial Production fell 4.2%, more than the minus 2.0% estimate. The previous month was revised higher to 1.7%. Japan’s industrial output slipped at the fastest pace since early last year in October, exposing widening cracks in the economy which faces a decline in domestic and foreign demand.

Additionally, Consumer Confidence came in at 38.7, slightly better than the 37.0 forecast and 36.2 previous read. Housing Starts dropped 7.4%. Traders were looking for a reading of -7.5%. The previous read was minus 4.9%.

BOJ’s Kuroda:  Not Considering Further Monetary Easing Now

Bank of Japan Governor Haruhiko said he was not considering further monetary easing at present, adding he would not hesitate to ease policy further if risks to the Bank of Japan’s 2% inflation target heighten.

The central bank is not at a stage where it needs to consider the timing and method of exit from monetary stimulus either, he told the financial committee of parliament’s lower house.

Kuroda also said on Friday that the central bank would not hesitate to ease policy further if the momentum towards its price stability target is lost as there’s “ample room” for more easing.

Speaking at parliament’s lower house financial committee, Kuroda also said the BOJ would weigh costs and benefits if the central bank were to deploy additional easing steps.

BOJ Governor Haruhiko Kuroda also said the central bank’s ultra-loose policy is aimed at hitting its inflation target, rather than funding government spending, warning against complacency in getting Japan’s fiscal house in order.

Weekly Forecast

This week there are no major economic reports from Japan, but traders will be closing monitoring the U.S.-China situation and U.S. economic data.

Investors will get the opportunity to react on Monday to the latest ISM Manufacturing report. On Wednesday, the ADP Non-Farm Employment Change and ISM Non-Manufacturing PMI reports will be the centers of attention.

On Friday, the major report is U.S. Non-Farm Payrolls. The headline number is expected to show the economy added 189K jobs in November. The Unemployment Rate is expected to hold steady at 3.6% and Average Hourly Earnings are forecast to have risen 0.3%.

The USD/JPY could continue to consolidate until an actual trade deal is signed and sealed. Or the Forex pair could retreat as the recent bills passed by the United States supporting anti-government protesters in Hong Kong remain a point of contention between Washington and Beijing.

If risk is on, the Dollar/Yen will rise. If risk is off then look for weakness in the USD/JPY.