USD/JPY Fundamental Weekly Forecast – Increased Trade Tensions Between US-China Should Pressure Dollar/Yen

The Dollar/Yen posted a modest gain last week with most of the buying taking place on Tuesday, following the Bank of Japan’s interest rate decision and monetary policy statement.

The USD/JPY settled at 111.273, up 0.257 or +0.23%.

The BOJ surprised a few traders on Tuesday when it voted to keep its ultra-easy monetary policy in place in a bid to stimulate inflation, which the central bank acknowledged will likely fall short of its 2% goal until at least 2021.

The central bank stayed with its overall policy framework despite a global wave of monetary tightening led by the Federal Reserve and despite speculation that it might tweak one of its rate targets to ease the side effects of prolonged easing. This was in response to bankers who said that low rates across the board have squeezed their profits.

The Bank of Japan’s nine-member policy board voted 7-2 to keep a key short-term interest rate at minus 0.1% and maintain its zero target for the yield on 10-year Japanese government bonds.

Most of the economic data from Japan was on the weak side. The Unemployment Rate rose to 2.4%, up from 2.2%. Preliminary Industrial Production was down 2.1%, versus an estimate of -0.3%.

Housing Starts fell 7.1%, well below the -2.5% forecast. Consumer Credit also fell to 43.5, below the 43.9 estimate.

The Bank of Japan also issued its monetary policy meeting minutes from June. BOJ policymakers said it was necessary to monitor the negative economic impact of continuing monetary stimulus amid stubbornly weak inflation, minutes of their June meeting showed on Friday.

The minutes suggest members of the central bank’s Policy Board recognized a need to make policy more flexible, setting the stage for their decision earlier this week to allow long-term yields to rise higher and tweak the bank’s asset purchases.

Forecast

We’re looking at the possibility of a two-sided trade this week. If concerns continue to be raised over the escalating trade tensions between the US and China then look for the Dollar/Yen to be pressured by safe-haven buying of the Japanese Yen.

A steep sell-off in the equity markets should generate a similar response.

Increased demand for higher risk assets and rising U.S. interest rates will underpin the USD/JPY.

There are no major economic reports from Japan this week.

Economic data from the U.S. will be scarce until Thursday when the U.S. Producer Price Index is released at 1230 GMT. It is expected to show a 0.2% gain versus the previously reported 0.3%.

On Friday, the Consumer Price Index is expected to show growth of 0.2%, up from 0.1%. The Core CPI is also expected to come in at 0.2%, matching the previous reading.