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USD/JPY Fundamental Weekly Forecast – Treasury Yields, Stock Market Volatility Key Market Drivers

By:
James Hyerczyk
Updated: Oct 21, 2018, 20:09 UTC

The divergence in the monetary policies of the U.S. Federal Reserve and the Bank of Japan continued to support the Dollar/Yen last week and is likely to continue to underpin the USD/JPY this week as long as Treasurys continue to move higher and stocks remain steady. Renewed volatility and selling pressure in U.S. equity markets could make the Japanese Yen desirable as a safe-haven asset.

USD/JPY

As easing of tensions in the U.S. stock market and higher U.S. Treasury yields helped the Dollar/Yen close higher last week. The previous week’s stock market volatility led to the dumping of risky assets and the buying of the safe haven Japanese Yen. Last week, stock market volatility eased somewhat, allowing Treasury yields to challenge multi-year highs once again. This encouraged investors to take profits in Japanese Yen positions they had bought the previous week.

For the week, the USD/JPY settled at 112.534, up 0.303 or +0.27%.

U.S. equity markets finished mixed last week with the Dow Jones Industrial Average posting a weekly gain, while the S&P 500 Index and NASDAQ Composite finished lower. All three major indexes held above the previous week’s low. There were also indications that volatility was easing.

The hawkish Fed minutes underpinned Treasury yields, making the U.S. Dollar a more attractive investment. Stocks were volatile, however, the Dow managed to close higher for the week.

The minutes from the U.S. Federal Reserve’s September meeting showed that Fed policymakers are largely united on the need to raise borrowing costs further. The minutes showed officials believe the central bank should continue to increase interest rates to ensure a stable economy.

A summary of the Federal Open Market Committee’s September session revealed both confidence in the rate of economic growth as well as some concern over the impact tariffs might have on GDP.

“With regard to the outlook for monetary policy beyond this meeting, participants generally anticipated that further gradual increases in the target range for the federal funds rate would most likely be consistent with a sustained economic expansion, strong labor market conditions, and inflation near 2 percent over the medium term,” the minutes read.

In other news, Bank of Japan Governor Haruhiko Kuroda on Friday warned of the need to be mindful of risks to the country’s moderate economic expansion, such as the rising tide of protectionism and volatile financial markets.

“We need to vigilant to recent protectionist moves and financial market developments. Still the economy is likely to continue expanding moderately,” Kuroda said in a speech at an annual meeting of credit associations.

Kuroda also said that while he saw no excesses building up in Japan’s financial system, regional financial institutions were seeing profits fall due to a dwindling population and prolonged low interest rates.

Earlier in the week, the Japanese Yen fell after Kuroda offered an upbeat view on the Japanese economy, but continued to back a low rate strategy to attain its inflation goal.

“Japan’s economy is expected to continue expanding moderately,” Kuroda said after meeting with regional branch managers.

Forecast

Economic data is limited this week to a U.S. Durable Goods report and an Advanced GDP report. Therefore, the direction of the USD/JPY is likely to be determined by the same factors that drove the price action last week:  Treasury yields and demand for risky assets.

The divergence in the monetary policies of the U.S. Federal Reserve and the Bank of Japan continued to support the Dollar/Yen last week and is likely to continue to underpin the USD/JPY this week as long as Treasurys continue to move higher and stocks remain steady.

Last week, the Fed came off as hawkish in its September meeting minutes and the Bank of Japan remained dovish based on the comments from Governor Kuroda.

Renewed volatility and selling pressure in U.S. equity markets could make the Japanese Yen desirable as a safe-haven asset.

The major economic reports this week will be Thursday’s Durable Goods and Friday’s Advance GDP. Core Durable Goods are expected to have risen 0.3%. This will be up from 0.0%. Advance GDP is expected to have risen 3.3%, lower than the previously reported 4.2% at the end of the second quarter.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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