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USD/JPY Fundamental Weekly Forecast – Global Stock Market Meltdown Will Sink Dollar/Yen

Sharply lower stock market opening in China should drive investors into the safe-haven Japanese Yen.
James Hyerczyk

The Japanese Yen opened the week with a gap to the downside before consolidating for two sessions then ending the week with a steep break. The price action was manipulated by a drop in U.S. Treasury yields, which tightened the spread between U.S. Government bonds and Japanese Government bonds, and lower demand for risky assets. Economic data from Japan had little impact on the price behavior.

Last week, the USD/JPY settled at 108.356, down 0.931 or -0.85%.

In the U.S., the benchmark 10-year Treasury yield was on track to post its biggest monthly drop since August 2019 as the deadly coronavirus fanned recession fears.

Additionally, the 10-year yield also dipped below the three-month Treasury rate of 1.552%, inverting a key part of the yield curve. This part of the yield curve is also closely watched by the Federal Reserve for signs of an economic downturn.

As far as demand for risk is concerned, global equity markets finished the weekly sharply lower as investors grew increasingly worried about the potential economic impact of China’s fast-spreading coronavirus.

The major global averages also saw an uptick in volatility. In the U.S., the benchmark S&P 500 Index closed marginally lower for January. The blue chip Dow Jones Industrial Average had its first monthly loss since August. All of this led to lower demand for risk, making the Japanese Yen an attractive safe-haven asset.

On the data front, Housing Starts, Preliminary Industrial Production and the Unemployment Rate came in better than expected. However, this positive news was offset by a drop in Consumer Confidence, a dip in Tokyo Core CPI and a plunge in Retail Sales.

BOJ Summary of Opinions

Recent talk among major central banks on how to avoid “Japanification” stirred debate within the Bank of Japan on whether it needs to review its policy framework, a summary of opinions at January’s rate review showed, Reuters reported.

There’s active debate on economic policies in Europe and the United States due to concern over prolonged low growth and inflation – so called Japanification,” one of the BOJ’s nine board members said.

“While taking into account the government’s fiscal policy and growth strategy, it’s necessary to review monetary policy in Japan too, given prolonged low growth and low inflation,” the member was quoted as saying at the January meeting.

Another opinion shown in the summary, released on January 29, called on the need for policymakers to guard against the risk of Japan sliding into deflation again.

“Risks regarding the economy and prices remain high, so we must think about how to deal with the risk of another recession,” the member was quoted as saying.

The BOJ board is currently split between those who see room to ramp up stimulus and those wary of the rising cost of prolonged easing.

Some members warned of the side-effects of the BOJ’s policy, with one saying that lowering borrowing costs won’t boost the economy much because households and companies continue to save more than they spend, the summary showed.

Another member said negative rates could hurt inflation expectations by making households and companies gloomier on the economic outlook, according to the summary.

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Weekly Forecast

USD/JPY traders are bracing for a plunge in Chinese stocks when the exchanges re-open on Monday. This could trigger a worldwide sell-off in equities. If this is the case then investors should flock to the safety of the Japanese Yen.

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