USD/JPY Fundamental Weekly Forecast – Trade Deal Optimism Providing Support Amid Thin Holiday Volume

The Dollar/Yen settled marginally higher last week while hovering just below the May 30 top at 109.930. The lackluster holiday trading conditions led to a mostly sideways-to-firm trade, but the lack of significant trading volume prevented the Forex pair from generating any significant momentum in either direction.

Optimism around easing trade tensions between the United States and China sapped demand for the usually safe-haven Japanese Yen. To look at it another way, strong demand from risky assets made the low-yielding Japanese Yen a less-attractive investment.

Last week, the USD/JPY settled at 109.464, up 0.008 or +0.01%.

U.S.-China News

The two economic powerhouses kept news to a minimum last week. Although some investors are concerned over the lack of details from the trade deal as well as uncertainly over when or where it will be signed, the worries weren’t strong enough to encourage investors to seek protection in the Japanese Yen. Furthermore, Washington and Beijing said the delay could be attributed to translation issues.

Beijing said on Wednesday it is in close touch with Washington on a trade deal signing ceremony, a day after U.S. President Donald Trump said he and Chinese President Xi Jinping will have a ceremony to sign the recently struck agreement.

Trump’s comment that a trade agreement is ‘done,’ basically underpinned the USD/JPY all week.

U.S. Economic Data

Last week’s U.S. economic news was mostly disappointing but traders took it in stride.

Core Durable Goods and Durable Goods Orders came in below expectations. New Home Sales also missed their mark as well as the Richmond Manufacturing Index. Weekly Unemployment Claims matched expectations.

Japanese Economic News

In economic news, Japanese retail sales data for November released on Friday came in worse than expected. Retail Sales declined 2.1% in November as compared with a year earlier, government data showed. That was below a median market forecast for a 1.7% decline, according to Reuters. The data follows a sales tax hike that went into effect in October.

Core consumer prices in Tokyo rose 0.8% in December from a year earlier, government data showed on Friday. The core consumer price index for Japan’s capital, which includes oil products but excludes fresh food prices, compared with economists’ median estimate for a 0.6% annual rise.

Japan’s jobless rate fell and the availability of jobs held steady in November, government data showed on Friday. The seasonally adjusted unemployment rate fell to 2.2% in November from 2.4% in the previous month, figures from the Ministry of Internal Affairs and Communications showed. That compared with a median market forecast of 2.4%.

Japan’s industrial output slipped for the second straight month in November, raising the likelihood the economy will contract in the fourth quarter due to slowing demand abroad and at home. Official data showed factory output fell 0.9% in November from the previous month, a slower decline than the 1.4% fall in a Reuters forecast. That followed a downwardly revised 4.5% decline in the previous month, the largest month-on-month slump since the government started compiling the data in comparative form in January 2013.

BOJ Summary of Opinions

A Bank of Japan policymaker played down the chance of meeting a proposal by the International Monetary Fund to tweak the central bank’s 2% inflation target into a looser goal set in a range, a summary of opinions at the BOJ’s December rate review showed, reported Reuters.

As stubbornly low inflation forces the BOJ to maintain a massive stimulus program despite the strain inflicted on financial institutions, the IMF said in a policy proposal in November the BOJ could make its price goal a more flexible one by adopting a target range for price moves, according to Reuters.

The idea runs counter to BOJ Governor Haruhiko Kuroda’s pledge to continue with his “powerful” monetary easing to hit 2% inflation at the earliest date possible, Reuters said.

Weekly Forecast

It’s another holiday-shortened week so trading volume is expected to come in below average, but likely higher than last week. This should lead to increased volatility. Traders are going to continue to respond to risk sentiment. A risk-on scenario should continue to underpin the USD/JPY, while a risk-off scenario is likely to keep a lid on any gains and could trigger a short-term break.

The major U.S. economic developments include Chicago PMI on Monday, the Conference Board Consumer Confidence report on Tuesday, the ISM Manufacturing PMI report and the FOMC Meeting Minutes on Friday.

Japan is on bank holiday until Friday.