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USD/JPY Fundamental Weekly Forecast – Will BOJ Tweak Yield Curve Control Settings on Tuesday?

The focus this week for investors will be on central bank monetary policy statements from the U.S. Federal Reserve and the Bank of Japan, and a slew of U.S. economic data. The BOJ begins its policy meeting on Monday with its statement on monetary policy due on Tuesday. Investors expect the BOJ to make no policy change. However, there is increasing speculation the BOJ may tweak its yield curve control settings in part because of lower bank profitability and muted inflation in Japan.
James Hyerczyk
Japanese Yen
Japanese Yen

The Japanese Yen rose sharply early last week on reports that the Bank of Japan could adjust its monetary policy to make the program more sustainable. According to Reuters, the BoJ was holding preliminary talks on making changes to its interest-rate targeting and stock-buying techniques. Any such shift would come years after BoJ Governor Haruhiko Kuroda started a massive bond buying initiative in 2013 to help eradicate deflationary pressures and buoy prices.

However, the central bank did try to make it clear that this wasn’t a tightening policy although the reaction in the markets suggested it was moving away from its easy money policy.

For the week, the USD/JPY settled at 111.016, down 0.446 or -0.40%.

After that initial reaction on Monday, the Dollar/Yen settled into a trading range as investors began to doubt that the BoJ will change its stimulus program when it meets next week. Helping to stabilize and consolidate the Forex pair was a sharp rise in U.S. Treasury yields.

The rest of the week, the USD/JPY treaded water in reaction to U.S. economic data and ahead of this week’s Bank of Japan Monetary Policy meeting.

In Japan, Flash Manufacturing PMI was lower than expected and the previous read at 51.6. Additionally, BOJ Core CPI came in at 0.4%, versus a 0.6% estimate and 0.5% previous read. Tokyo Core CPI was 0.8%, higher than the 0.7% forecast and previous read.

In the U.S. last week, Flash Manufacturing PMI came in better than expected along with the Richmond Manufacturing Index. Housing continued to disappoint with Existing Home Sales falling to 5.38 million units versus a 5.46 million unit forecast. New Home Sales also missed the mark with 631K units versus a 669K estimate.

The major reports included Durable Goods and Advance GDP. New orders for key U.S.-made capital goods increased more than expected in June and shipments surged, pointing to solid growth in business spending on equipment in the second quarter. Second-quarter GDP was the best in nearly 4 years, at 4.1 percent. The dollar weakened on Friday after the release of the GDP data as investors expressed doubt the growth would continue the rest of the year.

Forecast

The focus this week for investors will be on central bank monetary policy statements from the U.S. Federal Reserve and the Bank of Japan, and a slew of U.S. economic data.

The BOJ begins its policy meeting on Monday with its statement on monetary policy due on Tuesday. Investors expect the BOJ to make no policy change. However, there is increasing speculation the BOJ may tweak its yield curve control settings in part because of lower bank profitability and muted inflation in Japan.

The U.S. Federal Reserve’s Federal Open Market Committee will embark on its two-day meeting on Tuesday, although not much is expected to result from that. Still, investors will be watching for clues as to whether the central bank will raise rates for the fourth time this year in December. Furthermore, Fed officials may make comments on the impact of tariffs and the robust second-quarter GDP report.

Traders will also get the opportunity to react to a slew of U.S. Economic data.

On Tuesday, investors will get the opportunity to react to the Conference Board’s Consumer Confidence report. It is expected to come in slightly higher at 126.5 versus 124.4. Last month’s report came in below expectations, but traders showed no reaction to the news because the index remains at historical levels.

On Wednesday, investors will get the first look at U.S. employment data with the release of the ADP Non-Farm Employment Change report. It is expected to show the private sector added 186K jobs in July. ISM Manufacturing PMI is expected to come in at 59.4, slightly below the previously reported 60.2.

Finally, Friday’s U.S. Non-Farm Payrolls report is expected to show the economy added 193K jobs in June. The unemployment rate is expected to slip to 3.9% and Average Hourly Earnings are expected to increase 0.3%. Once again the focus will be on wages. Higher wage growth will keep the Fed on track to raise rates at least two more times this year. ISM Non-Manufacturing PMI is expected to come in at 58.7, down from 59.1.

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