USD/JPY Fundamental Weekly Forecast – Pressured by Flight-to-Safety Buying into Yen

The Dollar/Yen was under pressure last week on trade tensions and on revelations the Bank of Japan is under pressure to move away from its accommodative policy. Early in the week, the Yen was supported by solid domestic data. Late in the week, geopolitical tensions sparked a flight-to-safety rally into the Japanese Yen.

The USD/JPY settled at 110.933, down 0.340 or -0.31%.

Positive wage data and reports that the BOJ considered raising rates earlier in the year contributed to the Dollar/Yen weakness last week.

Japan’s household spending slid in June but real wages rose at their fastest pace in more than 21 years thanks to higher summer bonuses, a sign the benefits of a prolonged economic recovery are broadening.

Household income also marked the fastest gain in three years on an increase in temporary workers’ pay, offering some hope for BOJ policymakers struggling to accelerate inflation to their elusive 2 percent target.

Household spending fell 1.2 percent in June from a year earlier, government data showed on Tuesday, marking the fifth straight month of declines. But the fall was smaller than market forecasts of a 1.6 percent slide and a 3.9 percent drop in May.

Household’s inflation-adjusted income rose 4.4 percent in June, the biggest increase since July 2015, as a tightening job market pushed up temporary workers’ pay, the data showed.

Separate data showed workers’ real wages rose 2.8 percent in June from a year earlier, accelerating from a 1.3 percent increase in May and marking the fastest pace of growth since January 1997.

Japan’s Preliminary GDP rose 0.5%, up from -0.2%. Trader were looking for an increase of 0.3%. The Producer Price Index rose 3.1%, beating the 2.9% forecast and 2.8% previous reading.

A summary of opinions from the July 30-31 BOJ board meeting released on Wednesday showed that one member wanted to allow long-term yields to move in an even wider band than the range indicated by the central bank.

Geopolitical tensions in Turkey drove the Lira sharply lower, causing investors to dump higher-yielding currencies like the Euro, Australian and New Zealand Dollars. Money then flowed into the safe-haven Japanese Yen.

Forecast

Domestic data will be scarce this week, but investors will get the opportunity to react to data from the U.S. including Core Retail Sales, Retail Sales and Building Permits.

The data will take a backseat to renewed geopolitical tensions. If weakness in the Turkish Lira continues to drive contagion fears, money will flow into the safe-have Japanese Yen. According to reports, the European Central Bank (ECB) is concerned over the impact of a weak Turkish Lira on European banks. This may be the big story that Dollar/Yen investors will be watching this week.