USD/JPY Fundamental Weekly Forecast – Dollar/Yen Supported by Hawkish Fed, Dovish BOJ
The Dollar/Yen closed nearly 1% higher last week as U.S. Treasury yields firmed after the Federal Reserve reiterated its stance on tapering before the end of the year while suggesting a sooner-than-anticipated rate hike. Meanwhile, the Bank of Japan kept its benchmark interest rate at historically low levels while painting a bleak picture of the economy.
Last week, the USD/JPY settled at 110.743, up 0.768 or +0.70%.
Federal Reserve Holds Interest Rates Steady, Says Tapering of Bond Buying Coming ‘Soon’
The Federal Reserve last Wednesday held benchmark interest rates near zero but indicated that rate hikes could be coming sooner than expected, and it significantly cut its economic outlook for this year.
Along with those largely expected moves, officials on the policymaking Federal Market Committee indicated they will start pulling back on some of the stimulus the central bank has been providing during the financial crisis. There was no specific indication, though, as to when that might happen.
For now, the committee voted unanimously to keep short-term rates anchored near zero. However, more members now see the first rate hike happening in 2022. In June, when members last released their economic projections, a slight majority put that increase into 2023.
There were some substantial changes in the Fed’s economic forecasts, with the decrease in the growth outlook and higher inflation expectations.
Bank of Japan Holds Steady on Policy, Offers Bleaker View on Exports, Output
The Bank of Japan kept monetary policy steady on Wednesday but offered a bleaker view on exports and output, reinforcing expectations the bank will maintain its massive stimulus even as major counterparts eye a withdrawal of crisis-mode support.
“Exports and factory output continue to increase, although they are partly affected by supply constraints,” the central bank said in a statement announcing the decision. That was a gloomier view than in July, when it said exports and output “continued to increase steadily.”
The BOJ maintained its assessment on the economy, saying it was “picking up as a trend, although remaining in a severe state due to the impact of the pandemic.”
As widely expected, the BOJ maintained its short-term interest rate target at -0.1% and that for 10-year bond yields around 0%.
The advantage is clearly to the U.S. Dollar with the Japanese Yen picking up a bid only during extreme stock market weakness due to safe-haven buying.
Inflation is higher in the U.S. and the economy is stronger. Additionally, the Federal Reserve is edging closer to tightening monetary policy with the start of its tapering program.
Weak inflation has also reinforced expectations the BOJ will lag other major central banks in dialing back stimulus. Core consumer prices fell 0.2% in July from a year earlier to market the 12th straight month of declines, as weak consumption discouraged firms from passing on rising raw material costs to households.
Look for the USD/JPY to continue to rise as long as the spread between U.S. Government bonds and Japanese Government bonds continues to widen.