USD/JPY Fundamental Weekly Forecast – Stock Market Volatility Controlling the Price Action
The Dollar/Yen traded in a tight range last week as investors continued to absorb the wide “flash crash” volatility from the previous week. The lack of volatility in the stock market as well as a steady appetite for risky assets and commodity-linked currencies also helped hold the Forex pair in a tight range. The Dollar/Yen posted an inside move on the weekly chart which usually indicates investor indecision and impending volatility, but in this case, It may be presentative of a shift in investor sentiment.
Last week, the USD/JPY settled at 108.562, up 0.042 or +0.04%.
According to analysts, last week was the calmest on Wall Street since early October. For five sessions last week, the benchmark S&P 500 Index failed to move greater than 1 percent.
The USD/JPY rallied early last week as stock market strength encouraged investors to shed positions in the safe-haven Japanese Yen. The catalyst behind the rally in the equity markets was a positive feeling following the conclusion of three-days of mid-levels discussions between the United States and China over trade.
Pressuring the Forex pair was the dovish U.S. Federal Reserve minutes from the December monetary policy meeting. The minutes showed a willingness by policymakers to delay further interest rate hikes given the heightened volatility in the equity markets and concern about slowing global growth.
“Many participants expressed the view that, especially in the environment of muted inflation pressures, the FOMC could afford to be patient about further policy firming,” the minutes showed.
Policymakers also argued that muted inflation allowed the central bank “some latitude to wait and see” how the economic panned out in light of the rise in financial market volatility and increased uncertainty over the global economic outlook.
Dollar/Yen traders will be watching the headlines for information on the government shutdown and U.S.-China trade relations. However, it’s not the actual news that will move the Forex pair, but the volatility fueled by the news.
If volatility continues to revert to the mean then the USD/JPY is likely to remain rangebound, or sideways to higher. If there is a pick-up in volatility then look for the Forex pair to weaken as investors return to the safe-haven Japanese Yen.
The price action in the USD/JPY will be controlled by the volatility in the stock market.
In Japan this week, there are no major reports, but a speech by Bank of Japan Governor Kuroda on Thursday could move the markets. The minor reports include Preliminary Machine Tool Orders, Core Machinery Orders, Producer Price Index, Tertiary Industry Activity, National Core CPI and Revised Industrial Production.
In the U.S., the major report is the Producer Price Index. The minor reports are Philadelphia Fed Manufacturing Index and Preliminary University of Michigan Sentiment.
Several FOMC members are also scheduled to speak. So far most have been in favor of the Fed talking a break from rate hikes.
I think the wildcards this week are the trade deal and the government shutdown. I think everyone knows what the Fed is thinking so comments from Fed members will have a diminishing impact on gold prices. If risk is on then look for the USD/JPY to strengthen. If risk is off this week then watch for the USD/JPY to weaken with money following into the safe-haven Japanese Yen.