USD/JPY Fundamental Weekly Forecast – Lower Yields, Weak Stocks Bullish for Japanese Yen

Safe-haven buying and fear of lower interest rates helped drive the Dollar/Yen lower last week. The news stopped the nine-week rally with the formation of a technical closing price reversal top. This chart pattern typically triggers the start of a 2 to 3 week correction. Pressure is likely to continue on the Forex pair if global interest rates continue to fall along with demand for higher risk assets.

Last week, the USD/JPY settled at 111.170, down 0.763 or -0.68%.

Strong Dollar Drives Prices Lower

Besides the plunge in U.S. Treasury yields, traders also responded to dovish news from the European Central Bank and the Bank of Canada.

In the Euro Zone on Thursday, European Central Bank President Mario Draghi said the European economy was in “a period of continued weakness and pervasive uncertainty”. Conditions in the Euro Zone were perceived as so bad that the ECB:  pushed back the timing of its first post-crisis interest rate hike to 2020, cut its economic forecasts and launched a new round of cheap bank loans.

“A new series of quarterly targeted longer-term refinancing operations (TLTRO-III) will be launched, starting in September 2019 and ending in March 2021, each with a maturity of two years,” the central bank said in a statement.

The TLTROs are loans that the ECB provides at cheap rates to banks in the Euro area. The central bank’s decision comes at a time when there are increasing concerns about growth in the Euro Zone. ECB President Mario Draghi also cited a series of external risks as a reason for the new measures.

“The persistence of uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets appears to be leaving marks on economic sentiment,” Draghi told reporters Thursday.

The ECB also kept interest rates unchanged Thursday but updated its guidance for a rate hike. The ECB had previously said that rates would remain at these levels through to the end of summer, but Thursday, it said it now expects its key interest rates “to remain at their present levels at least through the end of 2019.”

The Bank of Canada (BOC) left its overnight rate at 1.75 percent as expected, citing a slowdown in the global, as well as Canadian economies.

“Recent data suggest that the slowdown in the global economy has been more pronounced and widespread than the Bank had forecast in its January Monetary Policy Report,” said the Bank in a statement announcing the rate hold. “While the sources of moderation appear to be multiple, trade tensions and uncertainty are weighing heavily on confidence and economic activity. It is difficult to disentangle these confidence effects from other adverse factors, but it is clear that global economic prospects would be buoyed by the resolution of trade conflicts.”

Canadian interest rates fell as investors reduced the odds of further BOC rate hikes later this year. In 2018, the central bank suggested it would be aggressive in raising the rate throughout 2019, but it now looks as if the Bank will not make another rate move until the fall, with some experts suggesting the Bank could lower the rate.

Risk Sentiment Tumbles

The Japanese Yen was further boosted as demand for global equities was pressured by a drop in risk sentiment. The catalyst behind the stock market weakness was weaker-than-expected trade balance data from China and a surprise drop in the number of U.S. jobs added in February.

In China on Friday, dollar-denominated February exports fell 21 percent from a year earlier. This was the biggest drop in three years and far worse than analysts had expected. Imports also dropped 5.2 percent.

U.S. government data showed the economy added just 20,000 jobs in February, compared with estimates for a gain of 180,000 positions. Somewhat offsetting the news was a drop in the unemployment rate to 3.8 percent. Average hourly earnings were another positive, increasing by 3.4 percent on year over year.

Weekly Forecast

USD/JPY traders will continue to be influenced by the movement in U.S. Treasury yields and U.S. equity markets.

At the forefront this week will be reports on U.S. Retail Sales, Durable Goods, Consumer Inflation and Producer Inflation. Fed Chair Powell is also scheduled to speak.

Weaker-than expected economic data and lower demand for risky assets will be bearish for the USD/JPY.

The Bank of Japan also meets this week. It is widely expected to leave interest rates unchanged at ultra-low levels. If they do make any announcements, they are likely to be on the dovish side which could provide some support for the USD/JPY.