USD/JPY Fundamental Weekly Forecast – Trader Reaction to 106.706 Sets the Tone; BOJ Stands Pat

The Dollar/Yen closed lower last week, finishing just slightly above the 50% level at 106.706 that was created by the February top at 112.226 and the March bottom at 101.185. Before the coronavirus spread around the world, the Dollar/Yen was moving higher with the S&P 500 Index. After the virus hit the U.S. and stock prices fell, and the Dollar/Yen collapsed.

Under normal trading conditions, the USD/JPY rose with demand for higher risk assets because of the carry trade – investors borrowed in cheap Japanese Yen and bought dollars to invest in U.S. equity markets. However, since the stock market bottom on March 23, we haven’t seen that relationship at all. This is because there are too many dollars out there.

Last week, the USD/JPY settled at 106.92, down 0.58 or -0.54%.

During the initial phase of COVID-19 pandemic, traders bought U.S. Dollars because of its appeal as a safe-haven asset. The Fed also flooded the market with dollars to maintain global liquidity. Every central bank was screaming for dollars.

As conditions began to improve, investors started dumping U.S. Dollars and buying Japanese Yen. With the USD/JPY sitting at 50% of the February to March trading range, this tells me that a major move is close.

If the global economy continues to show signs of improvement and global equity markets continue to rise then the USD/JPY is likely to remain under pressure.

If the spread of new coronavirus cases continues to rapidly increase and governments lose control of the outbreak, forcing them to shut down hotspots then we may see increased demand for the U.S. Dollar as a safe-haven asset.

It’s not about the Japanese Yen at this time per se, but rather what to do with all the U.S. Dollars in circulation. Dump them and the USD/JPY falls below 50% at 106.706. Keep them, and the USD/JPY maintains support at this price.

The Week Ahead

On July 15, the Bank of Japan will issue its latest monetary policy statement. It will also release its quarterly outlook. BOJ Governor Kuroda is also scheduled to hold a press conference.

We do not expect any changes to the monetary policy stance of the BOJ.

There are a slew of minor releases in the United States ahead of the Core Retail Sales and Retail Sales reports on June 16.

Traders expect to see improvements in Consumer Inflation, Industrial Production and Capacity Utilization. Particular attention will be paid to the Philadelphia Fed Manufacturing Index, Weekly Unemployment Claims and Preliminary Consumer Sentiment.

Most of the reports are based on stale data so the Weekly Unemployment Claims report could be a market mover especially if it reflects a major increase in jobs being lost because of the resurgence in COVID-19 cases.

Consumer Sentiment will also be watched carefully because a significant drop will indicate that consumers are probably thinking about going out less and most importantly spending less, as COVID-19 cases rapidly increase.