USD/JPY Fundamental Daily Forecast – BOJ Minutes Show Policymakers Discussed Disclosure of Exit Strategy

The Dollar/Yen spiked through a support level early Monday before erasing most of the loss throughout the session. Nonetheless, the buying was not strong enough to trigger a reversal into the close and the Forex pair closed lower.

The USD/JPY settled at 111.095, down 0.022 or -0.02%.

The early selling pressure was attributed to a weaker U.S. Dollar and political concerns. The intraday turnaround was fueled by better-than-expected U.S. economic news which boosted Treasury yields and position-squaring ahead of Tuesday’s Bank of Japan minutes and Wednesday’s U.S. Federal Reserve’s interest rate decision and monetary policy statement.

On Monday, U.S. home resales fell more than expected in June as a shortage of properties lifted house prices to a record high. According to the National Association of Realtors, existing home sales dropped 1.8 percent to a seasonally adjusted annual rate of 5.52 million units last month.

The HIS Markit Flash U.S. Composite PMI hit its highest level in six months, HIS said in a release the growth in business activity was driven “by a steeper increase in manufacturing production in July.”

The Flash Manufacturing PMI was 53.2, above the 52.3 estimate and 52.0 read in May. Flash Services PMI came in at 54.2, slightly below the 54.3 forecast. May’s number was revised to 54.2.

The data was strong enough to push the yield on the benchmark 10-year Treasury note higher to around 2.259 percent, while the yield on the 30-year Treasury Bond rose to about 2.834. This helped widen the interest rate differential between the U.S. Treasurys and the Japanese Government Bonds. This made the U.S. Dollar a more attractive investment.

Forecast

Earlier today, the Bank of Japan released the minutes of its June 15-16 monetary policy meeting. At this meeting, the BOJ kept monetary policy on hold while upgrading its assessment of private consumption for the first time in six months.

The minutes showed that Bank of Japan policymakers contested how much information the BOJ should disclose about a possible exit from quantitative easing. Some members said the central bank needed to clearly explain how it would manage policy and what impact it would have on the central bank’s finances. Others said consumer prices were still far from the central bank’s 2 percent inflation target, and disclosing information about a proposed exit too soon could cause market turbulence.

The USD/JPY showed little response to the minutes.

The Forex pair could be rangebound today as investors await Wednesday’s U.S. Federal Reserve interest rate decision and monetary policy statement. The Fed is widely expected to leave interest rates unchanged. According to the latest reading of the CME Group’s FedWatch tool, only about 3.1 percent of traders expected the central bank to lift interest rates.

Most investors will be watching the Fed statement for clues as to the timing of the next Fed rate hike and perhaps its assessment of the economy especially its inflation outlook.

In other news, investors will get the opportunity on Tuesday to react to the latest economic data on housing and manufacturing. The most important news is the Conference Board’s Consumer Confidence report. It is expected to come in slightly lower than the previous read at 116.5.

Also on Tuesday, Majority Leader Mitch McConnell has the Senate set to vote Tuesday on the first major test for the GOP effort to repeal and replace Obamacare. It’s only a vote on the motion to proceed to debate and amendments on the House-passed health care bill. However, this news may trigger a volatile reaction in the financial markets so it should be monitored.

A sharp break in U.S. equity markets, for example, could drive investors into the safety of the Japanese Yen.