USD/JPY Fundamental Weekly Forecast – ‘Risk-On’ Week Will Drive Dollar/Yen Higher

The Dollar/Yen settled higher last week after hitting its lowest level since March 2018 on August 26. Early in the week, the Forex pair spiked to the downside in reaction to volatile events on August 23. That day, U.S. equity markets plunged after China announced new tariffs on the United States, and the U.S. retaliated by increasing its tariffs on the world’s second-largest economy. President Trump also ordered U.S. companies to leave China, signaling an escalation of the trade war.

Last week, the USD/JPY settled at 106.271, up 0.851 or +0.81%.

The USD/JPY hit its low of the week and rallied sharply higher after President Trump said Beijing was actively reaching out to Washington to resume trade negotiations and “make a deal” to end a spiraling trade war. Trump made his remarks at a Group of Seven (G-7) summit in France with fellow world leaders, many of who had expressed concern over the impact of a deepening trade war between China and the U.S.

“I think we’re going to have a deal, because now we’re dealing on proper terms. They understand and we understand,” Mr. Trump said. “Very big things are happening with China.’

Later in the week, the 2-year/10-year U.S. Treasury yield curve inverted, which some believe is signaling a future recession, however, the USD/JPY remained supported by increasing demand for risky assets.

The Dollar/Yen was further supported on August 29 after China said it is willing to calmly resolve the trade dispute with the United States and is against any further escalation in tensions, Gao Feng, spokesman for China’s Ministry of Commerce, said Thursday.

“We firmly reject an escalation of the trade war, and are willing to negotiate and collaborate in order to solve this problem with a calm attitude,” Gao said, according to a CNBC translation of his Mandarin-language remarks. He noted that the Chinese and U.S. trade delegations have maintained “effective” communication.

Shortly after Gao’s comments were released, the United States and China announced that trade talks would begin on Thursday, September 5.

Weekly Forecast

This week, the direction of the USD/JPY is likely to be driven by Treasury yields and trader demand for risk. If risk is on and yields rise along with U.S. equities then look for the USD/JPY to strengthen. Weaker yields and a drop in demand for stocks will send investors into the safety of the Japanese Yen.

The catalysts this week are the resumption of trade talks on September 5 and Friday’s U.S. Non-Farm Payrolls report. Investors will likely be trading off of daily progress reports from the trade talks.

The U.S. Non-Farm Employment Change is expected to show the economy added 168K jobs in August, up from 164K. Average Hourly Earnings are expected to come in at 0.3%, matching last month’s increase. The Unemployment Rate is expected to hold steady at 3.7%.

A weaker-than-expected jobs report could raise questions about the strength of the economy. This could weaken the Dollar/Yen.