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James Hyerczyk
Japanese Yen USD/JPY

The Dollar/Yen fell last week as investors reacted to a dip in U.S. Treasury yields that tightened the spread between U.S. Government bond yields and Japanese Government bond yields. The catalyst behind the move was the anticipation of a Federal Reserve rate cut later this month. Most of the price action was dictated by U.S. economic news with news from Japan having very little influence.

Last week, the USD/JPY settled at 107.761, down 0.139 or -0.13%.

Japan

In economic news, Japanese manufacturers’ business confidence hit a three-year low in July, highlighting the fragility of the export-led economy as external demand slackens in the face of cooling global growth and trade friction, the Reuters Tankan showed.

Japan’s core inflation slowed to its weakest in about two years in June, underlining policymakers’ long battle to boost consumer prices and adding to speculation the Bank of Japan could deliver more stimulus later this month.

Finally, Bank of Japan Governor Haruhiko Kuroda said on Thursday the central bank will scrutinize economic developments until the last minute in deciding policy this month, suggesting that whether to stand pat or increase stimulus will be a close call.

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United States

On July 16, Federal Reserve Chairman Jerome Powell repeated his pledge to “act as appropriate” to keep the economic expansion going as his fellow central bank policymakers move toward an expected interest rate cut later this month. Traders interpreted this to mean the Fed would cut rates 25-basis points when it meets on July 30-31.

On July 18, New York Federal Reserve President John Williams argued for pre-emptive measures to avoid have to deal with too-low inflation and interest rates. The dollar plunged against the Japanese Yen as investors thought his comments bolstered expectations of an aggressive interest rate cut this month.

The dollar reversed to the upside against the Japanese Yen on Friday, but still ended the week lower after the New York Federal Reserve walked back Williams’ dovish comments. Furthermore, the Wall Street Journal reported that the Fed would cut rates by a quarter-percentage point and raise rates later if needed.

In economic news, the Empire State Manufacturing Index, Retail Sales and the Philly Fed Manufacturing Index, all came in better-than-expectations. Building Permits, however, came in lower than expected.

Weekly Forecast

The major event from Japan this week is a speech by Bank of Japan Haruhiko Kuroda on Monday at 15:00 GMT. Kuroda could move the USD/JPY if he mentions the need for additional stimulus from the BOJ.

In the U.S., investors will be watching Core Durable Goods on Thursday and Advance GDP on Friday.

The markets have priced in a 25-basis point rate cut on July 31. The source of volatility this week for USD/JPY traders will be whether there will be a 50-basis point rate cut. There are no Fed speakers scheduled this week so traders are going to have a hard time determining the chances of the more aggressive half-percentage point rate cut. Therefore, I’m not expecting to see much movement in the Dollar/Yen. If there is, we’re likely to see position-squaring and short-covering.

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