USD/JPY Fundamental Weekly Forecast – Direction of Long-Term US Rates Will Set the Tone

The Dollar/Yen dropped sharply last week as investors began pricing in a Joe Biden victory in the U.S. presidential election and the prospect of more gridlock in the U.S. Congress. The news meant that the Biden administration would have a hard time fulfilling campaign promises like higher taxes, but it also signaled less emphasis on trade wars. Furthermore, expectations for a massive U.S. fiscal stimulus package were dampened.

Last week, the USD/JPY settled at 103.370, down 1.302 or -1.24%.

Removing massive coronavirus stimulus from the agenda sent bond yields sharply lower in anticipation of less borrowing and more quantitative easing from the U.S. Federal Reserve. The plunge in long-term U.S. Treasury Bond yields made the dollar a less-attractive investment, driving up demand for the Japanese Yen.

The volatility in the Japanese Yen also rattled Bank of Japan and government officials.

Japan’s PM Suga Says Stable Currency Moves ‘Extremely Important’

Japanese Prime Minister Yoshihide Suga on Friday vowed to work closely with overseas authorities to keep currency moves stable, signaling his readiness to respond to any Yen spike that threatens to derail the country’s fragile economic recovery.

“Exchange-rate stability is extremely important,” Suga told parliament, when asked how Japan will respond to any changes a new U.S. administration could make to its dollar policy.

“We will respond appropriately on markets, while keeping in close contact with overseas authorities,” Suga said. He declined to comment on specific currency levels or moves.

Kuroda Says BOJ Will Help Keep FX Moves Stable

Bank of Japan Governor Haruhiko Kuroda said the central bank will work closely with financial authorities to keep currency moves stable, adding he was closely watching how the outcome of the U.S. presidential election could affect markets.

“It’s extremely important to keep exchange-rate moves stable,” Kuroda told an online meeting with business leaders in Nagoya, central Japan, last Wednesday.

Weekly Outlook

The USD/JPY fell sharply to an eight-month low last week on diminished hopes for a large stimulus package to support the economy any time soon.

This trend could continue this week because last Friday, Republican Senator Mitch McConnell said the economic recovery justified a smaller aid bill in the wake of a drop in the unemployment rate in October’s Non-Farm Payrolls report. This means he’s likely to stick to his guns, while Democratic House Speaker Nancy Pelosi again rejected more narrow legislation. In other words, the election didn’t change anything.

With the short-term outlook clouded by doubts about where fiscal policy may be headed in coming weeks, the Federal Reserve may be asked to carry more weight. This could keep the pressure on longer-term interest rates and the U.S. Dollar.

The topic of interest that could become relevant if the USD/JPY starts heading toward the 100.00 level is the possibility of an intervention or more monetary easing by the Bank of Japan. The Japanese government and central bank would like to see a weaker Japanese Yen because the economy relies on exports and a strong Yen means less foreign buying of Japanese goods and services.