USD/JPY Fundamental Weekly Forecast – Despite Dovish Tone From BOJ, Yen Supported by Safe-Haven Demand

Economic conditions in Japan are bearish given the outlook from the Bank of Japan. Furthermore, Japan’s 10-year bond yield fell below zero for the first time since September 2017. However, the Japanese Yen is being driven higher by increased demand for the safe-haven currency. This trend is likely to continue this week, given the problems in the United States.  
James Hyerczyk
USD/JPY
USD/JPY

The Dollar/Yen finished lower last week as investors continued to seek shelter in the safe-haven Japanese Yen in reaction to heightened stock market volatility. In addition to the stock market’s wild swings, investors continued to seek shelter from a number of issues causing uncertainty in the financial markets.

These included a lack of confidence in the U.S. Federal Reserve, the ongoing partial government shutdown in Washington and worries over a possible U.S. recession. Investors also aren’t sure whether U.S. and China negotiators will be able to hammer out a new trade agreement by the self-imposed March 1 deadline.

Last week, the USD/JPY settled at 110.294, down 0.911 or -0.82%.

In other news, Bank of Japan policymakers disagreed on the feasibility of allowing bond yields to move more flexibly around the central bank’s zero percent target, reflecting division within the board on how to address the growing dangers of prolonged easing, according to the BOJ minutes.

According to Reuters, “One member said the central bank should not rule out options such as widening the range in which bond yields could move, or shortening the duration of the government bond yield that it targets from the current 10-year yield, the minutes showed.”

“Another member disagreed, however, saying that doing so when inflation remained low could determine the BOJ’s credibility by casting doubt on its commitment to achieve its inflation target.”

In its Summary of Opinions, BOJ policymakers warned the global economic outlook was worsening and recent oil price falls could further delay achievement of their 2 percent inflation target.

“Uncertainty over the global economic outlook is heightening. Given such conditions are likely to persist, risks are generally skewed to the downside,” one member was quoted as saying.

Forecast

Economic conditions in Japan are bearish given the outlook from the Bank of Japan. Furthermore, Japan’s 10-year bond yield fell below zero for the first time since September 2017. However, the Japanese Yen is being driven higher by increased demand for the safe-haven currency. This trend is likely to continue this week, given the problems in the United States.

The major U.S. report on Friday will be the December U.S. Non-Farm Payrolls report. It is expected to show the economy added 181K jobs, up from 155K. The unemployment rate is expected to remain steady at 3.7%. Average Hourly Earnings is forecast to have risen by 0.3%.

Since the market seems to think the economy is not as strong as the Fed surmises, the jobs report could offer some major insights into the central bank’s next move on interest rates.

A stronger than expected jobs report will support the Fed’s notion that the economy is strong and needs to be tamed with consistent rate hikes. A weaker than expected report will throw more support towards a weakening economy.

The Fed’s stance on future rate hikes may be clarified on Friday at 1515 GMT when Fed Chair Jerome Powell delivers a speech at an economic conference. Risk appetite could deteriorate further if Powell comes across as hawkish. This could drive the Aussie and Kiwi lower.

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