USD/JPY Fundamental Weekly Forecast – Will Safe-Haven Demand Offset Impact of Powell’s Testimony?

The Dollar/Yen finished higher last week, backed by strong buying throughout the week before suffering a mild set-back on Friday. Most of the strength during the week was fueled by a jump in demand for higher risk assets, which encouraged investors to shed positions in the safe-haven Japanese yen. Stronger-than-expected U.S. economic data also contributed to the rally although investor chose to ignore a strong U.S. jobs report on Friday.

Last week, the USD/JPY settled at 109.782, up 1.426 or +1.32%.

Safe-Haven Demand Drops on China Stimulus

The safe-haven yen was under pressure early in the week as an improvement in risk appetite encouraged investors to lift their hedges placed as protection against a further decline in global equity markets.

The People’s Bank of China (PBOC) pumped hundreds of billions of dollars into the financial system last week. This helped stabilize Chinese stocks as well as global equities. According to reports, the PBOC is also likely to lower its key lending rate – the loan prime rate – on February 20, and cut banks’ reserve requirement ratios in the coming weeks, policy sources told Reuters.

U.S. Economic Data Supportive

Throughout the week, the USD/JPY was also driven higher by improving U.S. economic data. ISM Manufacturing PMI rose to 50.9. Factory Orders jumped 1.8% and ISM Non-Manufacturing PMI came in at 55.5.

Preliminary Nonfarm Productivity rose 1.4% and Weekly Unemployment Claims fell to 202K.

The January Non-Farm Payrolls report was better than expected, which give the Federal Reserve a reason to hold interest rates steady, however, lower global equity markets offset this news, pushing investors into the safety of the Japanese Yen.

Japan Data Comes in Weak

In Japan, Final Manufacturing PMI fell to 48.8, missing the 49.3 forecast. Household Spending dropped 4.8%, well-below the -1.7% forecast and 2.0% previous read.

Japanese household spending fell at a much faster pace than expected in December, sliding for the third straight month in a sign consumers are having a hard time coping with a sales tax hike.

The world’s third-largest economy is struggling to regain momentum after last October’s sales tax hike led consumers to curb spending. China’s coronavirus epidemic also poses a new threat to the global growth outlook and Japan’s output and exports.

Weekly Forecast

Based on Friday’s price action and trader reaction to the strong U.S. Non-Farm Payrolls report, it’s clear that the impact of the coronavirus and its influence on demand for risky assets is driving the price action in the USD/JPY. Therefore, demand for risk will be bearish for the Dollar/Yen. However, further weakness in global equity markets will drive investors into the safe-haven Yen.

There are no major reports out of Japan, but investors should pay attention to Wednesday’s Preliminary Machine Tool Orders and Friday’s Tertiary Industry Activity.

In the U.S., Federal Reserve Chairman Jerome Powell’s testimony before Congress could set the tone on Tuesday and Wednesday. Traders will be watching Thursday’s CPI report and Friday’s Retail Sales report for direction.