USD/JPY Fundamental Weekly Forecast – Could Strengthen on Fiscal Stimulus Stalemate

The Dollar/Yen closed marginally higher last week, boosted by increased demand for risky assets, which helped dampen demand for the safe-haven Japanese Yen, but confusion over a U.S. fiscal stimulus deal helped heighten the volatility. Based on Friday’s price plunge, fiscal stimulus is likely to be the main driver of the action this week.

Last week, the USD/JPY settled at 105.630, up 0.295 or +0.28%.

Yen Strengthens as Odds of Biden Win Increase

After spending the early part of the week in a strong position to breakout to the upside on the weekly chart, the USD/JPY tumbled on Friday, erasing most of the week’s earlier gains. Besides the volatility fueled by the “on-again, off-again” fiscal stimulus discussion, the dollar was also pressured as expectations grew that Joe Biden would win the U.S. presidency and offer fiscal stimulus after the elections.

Reuters reported that several Wall Street banks forecast a stimulus package no matter which candidate wins, but say that a Biden presidency, if Democrats also retake control of the Senate, would be likely to result in a bigger one. UBS Asset Management, for example, is assigning a 75% probability of a Biden win.

“Besides possibly losing the presidency, Republicans may also lose control of the Senate as betting odds are giving Democrats a near 70% chance of taking the Senate,” Brown Brothers Harriman strategists said.

Additionally, rising expectations of a Biden victory has had a calming effect on market volatility and boosted appetite for currencies that have been hurt by the trade war between Washington and Beijing. The U.S. Dollar was being viewed as a safe-haven, but as the polls started to support Biden, investors began to dump the greenback.

Weekly Forecast

Fiscal stimulus developments will be the main price driver this week, and based on events over the weekend, it looks as if policymakers aren’t any closer to a deal than they were early last week. This bodes well for the U.S. Dollar if stock market investors take the new developments seriously and decide to trim positions and take profits after last week’s rally.

Last week, the Dollar/Yen rallied after President Trump called off negotiations for a stimulus package. Prices chopped around the rest of the week after Trump softened his tone, and House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin continued to discuss terms. The USD/JPY held its ground on Thursday after Trump called for a “skinny” relief bill, but then plunged on Friday after talks fell through.

Over the weekend, Pelosi said in a letter to Democrats, “This (Trump’s) proposal amounted to one step forward, two steps back.”  Unless something changes on Sunday, it looks as if the House Democrats and the Senate Republicans are still far apart on a deal. If this triggers a sell-off in the stock market then look for the USD/JPY to strengthen this week. By some miracle, a deal is reached then before the November 3 election then money is likely to flow out of the safe-haven Dollar and into the Japanese Yen.

For a look at all of today’s economic events, check out our economic calendar.