USD/JPY Fundamental Weekly Forecast – Risk Sentiment Driving the Price Action

The Dollar/Yen closed lower last week as a sell-off in U.S. equity markets sent investors looking for protection into the safe-haven Japanese Yen. The catalyst behind the move was uncertainty over U.S. stimulus.

For the week, the benchmark S&P 500 Index shed 0.96%. The blue chip Dow Jones Industrial Average lost 0.57% and the tech-weighted NASDAQ Composite lost 0.69%. The declines for the S&P and NASDAQ marked their biggest weekly declines since the end of October.

In response to the drop in demand for risky assets, the USD/JPY settled at 104.049, down 0.141 or -0.14%.

US Coronavirus-Aid Impasse Weighs on Demand for Risk

Helping to drive down demand for equities and consequently the Dollar/Yen was an impasse in the U.S. Congress over a new COVID-19 Relief package.

The U.S. Senate, facing a midnight deadline on Friday, unanimously approved a one-week extension of federal funding to avoid a government shutdown and to provide more time for separate negotiations on COVID-19 relief and an overarching spending bill.

Lawmakers have wrangled for months over a fresh fiscal stimulus package to support an economy battered by coronavirus lockdowns. New York Governor Andrew Cuomo on Friday suspended indoor dining in New York City, effective Monday.

Japan Economic News:  Surprise Jump in Final GDP, Core Machinery Orders

Japan’s economy grew an annualized 22.9% in July-September, better than the initial estimate of a 21.4% expansion, revised data from the Cabinet Office showed on Tuesday, as it rebounded from a COVID-induced recession.

The revised figure for gross domestic product (GDP) compared with economists’ median forecast for 21.5% growth in a Reuters poll.

Japan’s Core machinery orders rebounded sharply in October from the previous month’s drop, the government said on Wednesday, a welcome development for an economy emerging from a deep coronavirus slump.

The jump in core orders suggests a modest revival in corporate spending, seen by policymakers as necessary to accelerate the recovery in the world’s third-largest economy.

Core machinery orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, soared 17.1% in October, recouping the previous month’s 4.4% drop.

The increase, the largest month-on-month rise since comparable data became available in 2005, was much better than a 2.8% expansion forecast by economists in a Reuters poll.

Weekly Forecast

We believe that the start of vaccinations in the United States will take a backseat to concerns over a COVID-19 relief package. Nonetheless, USD/JPY traders will take their cues from risk sentiment.

A rise in risk sentiment will likely boost the Dollar/Yen, while a drop in demand for risky assets will likely send investors into the Japanese Yen for safety.

The U.S. Federal Reserve meets on December 15-16. Policymakers are going to spend a lot of time discussing the downside risks to the economy. The Fed essentially has four key questions to deal with.

1. With risks mounting, how will officials adjust their asset purchase plans?
2. How will the Fed respond to rising downside risks?
3. How will the Summary of Economic Projections look with potential positive signs of a vaccine?
4. How will markets react when special Fed lending programs officially shut down?

In other news, the Bank of Japan is widely expected to leave interest rates and policy unchanged.

For a look at all of today’s economic events, check out our economic calendar.