USD/JPY Fundamental Weekly Forecast – US Holiday Week Could Lead to Low Volume, Low Volatility

The Dollar/Yen settled lower last week, driven by renewed concerns over the progress of U.S.-China trade negotiations. The direction of the Forex pair was also impacted by central bank commentary, domestic data and U.S. economic results.

The Japanese Yen was basically supported by safe-haven buying. Further evidence that investors were seeking protection could be seen in falling U.S. Treasury yields and weaker U.S. equity markets.

Last week, the USD/JPY settled at 108.652, down 0.133 or -0.12%.

US-China Trade Confusion Sends Investors into Safe-Haven Japanese Yen

Uncertainty over a U.S.-China trade deal was primarily responsible for a drop in demand for risky assets last week. Of particular concern was U.S. President Trump’s threat to raise tariffs on Chinese goods if the two economic powerhouses do not strike a deal.

Reuters also reported, citing trade experts and people close to U.S. President Donald Trump’s administration, the completion of a partial trade deal could be pushed into 2020 as China seeks more extensive tariff rollbacks. That report came after The Wall Street Journal reported, citing former Trump administration officials, that the ongoing trade talks could hit an impasse.

Global stocks took a beating on Thursday as a fresh row between Washington and Beijing over U.S. legislation on Hong Kong threatened to undermine their trade talks and delay a “phase one” deal that investors had initially hoped to be signed by now, according to Reuters.

The USD/JPY began to firm late in the week, following a string of positive comments. Gao Feng, China’s Ministry of Commerce spokesman said, “external rumors” about trade talks are not accurate, and noted the two trade delegations remain in close communication.

Shortly afterwards, there was a report that China invited the U.S. trade delegation to Beijing for face-to-face talks. President Trump then told Fox News both sides were “very close,” and Chinese President Xi Jinping told a visiting U.S. business delegation that China holds a “positive attitude” toward the trade talks.

Japanese Exports Fall

Japanese merchandise trade data for October from the Ministry of Finance showed exports for the month fell 9.2% year-on-year – well off the 7.6% year-on-year decline expected by economists in a Reuters poll. The plunge in exports marked the 11^th consecutive monthly decline. The drop was blamed on weakening demand for vehicles and aircraft parts from the United States.

Exports to China fell 10.3 percent from a year earlier to 1.32 trillion Yen, weighed down by declining shipments of plastic raw materials and auto parts.

Japan’s trade surplus with the United States shrank 2.7 percent from a year earlier to 557.4 billion Yen amid sluggish auto-related exports.

Other News

Bank of Japan (BOJ) Governor Haruhiko Kuroda said the central bank has room to deepen negative interest rates, but he signaled there were limits to how far it can cut rates or ramp up stimulus.

On the data front, the U.S. Dollar was supported late in the week after a report on consumer sentiment for November came in better than expected. The index rose to 96.8 from 96.5 in October. IHS Markit’s gauges for the U.S. services and manufacturing sectors also rose.

Weekly Forecast

This is a holiday week in the U.S. with the country celebrating Thanksgiving on Thursday and the kick-off of the Christmas shopping season on Friday. This could lead to distorted moves in the financial markets due to low volume and volatility.

We don’t expect to see any major developments in the trade talks, but will be ready for any surprises especially since below average volume could lead to exaggerated price action.

In the U.S., on Tuesday, investors will get the opportunity to react to the Conference Board’s Consumer Confidence report. On Wednesday, the Chicago PMI will be released.