USD/JPY Fundamental Weekly Forecast – Pressured by Falling Demand for Risk

The Dollar/Yen finished at an eight month low as safe-haven buying and the pricing in of another Fed rate cut in September made the Japanese Yen a more attractive asset and the U.S. Dollar a less-desirable investment. There was central bank activity in the U.S. and Japan last week, but the primary driver of the price action that led to the lower close was the unexpected announcement of new tariffs on China by President Trump late in the week.

Last week, the USD/JPY settled at 106.604, down 2.072 or -1.91%.

BOJ Will Act ‘Without Hesitation” if Necessary

At its policy meeting on July 30, the Bank of Japan held off expanding stimulus but committed to doing so “without hesitation” if a global slowdown jeopardizes the country’s economic recovery. The BOJ welcomed the Fed’s rate cut on July 31, saying that the decision would have a positive effect on Japanese and global economies by keeping U.S. growth on a solid footing.

Bank of Japan Deputy Governor Masoyoshi Amamiya said the BOJ, too, could ease policy as an insurance against risks to the economy, though it will not necessarily give markets any advance signal of such action.

Amamiya also said the central bank could widen the band at which it allows long-term interest rates to move around its target, signaling its readiness to accept further falls in bond yields if driven by market forces.

Fed Cuts as Expected, but Powell Confuses Investors

On July 31, the U.S. Dollar jumped against the Japanese Yen after the Federal Reserve cut interest rates by 25 basis points for the first time since 2008. The dollar rose to a two-month high versus the Japanese Yen as U.S. Federal Reserve Chairman Jerome Powell ruled out a lengthy easing cycle after delivering the first rate cut since the financial crisis.

At a press conference after the Fed’s decision, Powell said “it’s not the beginning of a long series of rate cuts.” Following a volatile reaction in the stock and Treasury markets, Powell backtracked a little saying, “I didn’t say it’s just one rate cut.”

A day prior to the Fed’s meeting, traders had forecast a 35% chance of three cuts by the end of the year. After the Fed’s decision and Powell’s comments, that figure had fallen to 12%, according to the CME Group’s FedWatch tool. This helped make the U.S. Dollar a more attractive investment.

Yen Soars on Safe-Haven Buying

The U.S. Dollar/Yen fell from a two-month high after President signaled a potential escalation of trade tensions between the U.S. and China when he announced on August 1 an additional 10% tariff on $300 billion worth of Chinese imports starting September 1. The news sent Treasury yields plunging to three-year lows as financial market traders almost fully priced in a September rate cut. Weaker yields turned the greenback into an undesirable asset. Demand for risky assets dropped and investors flocked into the Japanese Yen for safety.

Mixed U.S. Jobs Report Weighs on Dollar

Compounding the weakness in the Dollar/Yen at the end of the week was news of slower U.S. employment growth in July. Nonfarm payrolls increased by 164,000 jobs in July, fewer than the month prior, and wages increased modestly, the Labor Department said. Some traders believe the report increased the case for a Fed rate cut in September.

Weekly Forecast

Like the safe-haven gold market, the price action in the USD/JPY this week will be dictated by the need for protection against falling demand for higher-yielding assets.

The USD/JPY should strengthen if yields reverse to the upside and stocks start to recovers some of last week’s losses. Look for the Dollar/Yen to continue to weaken if the interest rate differential between U.S. Government bonds and Japanese Government bonds continues to tighten and investors continue to dump stocks.