USD/JPY Fundamental Weekly Forecast – Uncertainty Over Brexit Likely to Weigh on Dollar/Yen

The progress in the U.S.-China trade talks may be a positive that underpins the USD/JPY. Meanwhile, the Brexit talks create more uncertainty that could weigh on demand for risky assets.
James Hyerczyk
USD/JPY

The Dollar/Yen drifted on both sides of the previous week’s close most of the week before closing marginally lower. The price action primarily reflected the demand for risky assets as major investors sat on the sidelines while waiting for the outcome of Brexit negotiations.

The biggest move for the week was on Tuesday when better-than-expected earnings results drove U.S. stocks sharply higher. This jump in demand for risk made the Japanese Yen a less-desirable asset.

On Thursday, the Dollar/Yen posted a potentially bearish chart pattern following the announcement of a tentative deal between the United Kingdom and the European Commission. A sharp break in U.S. equities late Friday helped turn the Forex pair lower for the week.

The USD/JPY settled the week at 108.408, down 0.019 or -0.02%.

BOJ Kuroda Says Central Bank Can ‘Certainly’ Cut Short-Term Rates if Necessary

The Bank of Japan will “certainty” reduce short-to-medium-term interest rates if it needed to ease monetary policy, Governor Haruhiko Kuroda said, suggesting that deepening negative rates will be the primary tool to fight growing overseas risks.

Kuroda also said the BOJ already has a flexible framework that allows it to accelerate purchases of exchange-traded funds if markets become volatile, signaling its readiness to moderate stock price falls that could hurt business sentiment.

“On the whole, the world economic outlook…has become less buoyant. And the timing of (pick-up) of world economic growth has been somewhat delayed,” Kuroda said, adding that risks continue to be “fairly high.”

“If we need further easing of monetary conditions, we would certainly reduce short-to-medium-term interest rates. But we don’t want to reduce super-long interest rates,” he said on Saturday after attending the International Monetary Fund and World Bank Meetings.

Weak U.S. Economic Data

Helping to pressure the USD/JPY last week was weak U.S. economic data. According to reports, Core Retail Sales came in at -0.1% and Retail Sales came in at -0.3%, both lower than the forecasts. The Philly Fed Manufacturing Index also disappointed with a reading of 5.6, lower than the 7.3 forecast and 12.0 previous read.

As of Friday’s close, the CME Fed Watch Tool forecast a 91.4% chance of a 25-basis point rate cut on October 30. This helped make the U.S. Dollar a less-desirable investment.

Weekly Forecast

Economic data is scarce this week which means investors are likely to continue to monitor the events surrounding U.S.-China trade relations and Brexit.

U.S. President Donald Trump on Friday said he thought a trade deal between the United States and China would be signed by the time the Asia-Pacific Economic Cooperation meetings take place in Chile on November 16-17.

Meanwhile, Chinese Vice Premier Liu He said on Saturday, “The two sides have made substantial progress in many fields, laying an important foundation for the signing of a phased agreement. Stopping the escalation of the trade war benefits China, the U.S. and the whole world. It’s what producers and consumers alike are hoping for.”

On Saturday, U.K. Prime Minister Boris Johnson was thwarted by a cross-party group of politicians who voted to postpone the “meaningful vote” on his new divorce deal and force him to ask Brussels for an extension to the current October 31 Brexit deadline.

Johnson grudgingly asked for an extension to the deadline late on Saturday night, but EU leaders don’t necessarily have to accept it.

The special parliamentary session in the House of Commons offered little detail on when, or even if, Britain will finally exit the European Union.

The progress in the U.S.-China trade talks may be a positive that underpins the USD/JPY. Meanwhile, the Brexit talks create more uncertainty that could weigh on demand for risky assets.

Based on these assessments, we’re likely to see a sideways-to-lower trade in the USD/JPY this week. However, there is a wildcard. Stronger-than-expected earnings in the U.S. could drive up demand for risk.

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