USD/JPY Fundamental Weekly Forecast – Traders Will Be Watching for China’s Response to New U.S. Tariffs

Last week’s rally by the Japanese Yen was fueled by safe-haven buying. The catalysts were a steep plunge in U.S. equity markets and a drop in U.S. Treasury yields. For the first four days of the week, the currency was pressured by limited economic data, a more positive outlook for the U.S. economy and the possibility of hawkish comments from Fed Chair Powell.

The USD/JPY finished the week at 105.420, down 0.903 or -0.85%.

Domestically, Japan’s Trade Balance was -0.13 Trillion versus -0.15 Trillion. Flash Manufacturing PMI remained in contraction territory at 49.5, below the 49.8 forecast. All Industries Activity was -0.8% worse than the -0.7% estimate. The previous month was revised higher to 0.5%.

Dovish Comments from Fed’s Powell Caps Dollar’s Gains

Remarks from Federal Reserve Chairman Jerome Powell on Friday put some pressure on the dollar due to their dovish nature. Powell did not announce a major stimulus measure to ease concerns over a slowdown in global economic growth, but did prepare investors for further interest rate cuts. Powell acknowledged the U.S. economy was in a “favorable place” and the Fed would “act as appropriate” to keep the current economic expansion on track.

Trump Escalates US-China Trade Tensions

President Trump triggered a steep break in the Dollar/Yen when he tweeted, “Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA.”

The move by the greenback indicates there are increasing concerns that Trump’s latest comments will push the U.S. economy into a recession.

Weekly Forecast

On Friday, after Trump’s initial Twitterstorms, the President announced that Washington will impose an additional 5% duty on Chinese goods. Trump said the United States would raise its existing tariffs on $250 billion worth of Chinese imports to 30% from the current 25% beginning on October 1, the 70^th anniversary of the founding of the communist People’s Republic of China.

At the same time, Trump announced an increase in planned tariffs on the remaining $300 billion worth of Chinese goods to 15% from 10%. The United States will begin imposing those tariffs on some products starting September 1, but tariffs on about half of those goods have been delayed until December 15.

Given China’s retaliatory tariffs on Trump’s August 1 tariffs and Japanese Yen’s reaction, we have to expect China to hit the U.S. with a countermeasure that could send the USD/JPY sharply lower this week.

Later this week, Dollar/Yen investors will get the opportunity to react to a number of major U.S. economic reports. These reports include Durable Goods, Conference Board Consumer Confidence, Preliminary GDP and Personal Spending.

Preliminary GDP is expected to come in at 2.0%, down from the first estimate of 2.1%. This is the major report in my opinion because this will let investors know how much closer the economy has moved toward a recession. Remember, the classic definition of a recession calls for 2 consecutive quarters of negative economic activity. A weaker than expected number could trigger a further decline in the USD/JPY.