USD/JPY Fundamental Daily Forecast – Long-Term Bullish Because of Hawkish Fed, Short-term Headline Driven

The Dollar/Yen is trading marginally lower on Tuesday following the previous day’s steep sell-off on reduced concerns over North Korea and a steady reaction to the Bank of Japan minutes.

On Monday, the USD/JPY settled at 111.712, down 0.268 or -0.24%. At 0600 GMT, the Forex pair is trading 111.640, 0.072 or -0.06%.

Yesterday, the Japanese Yen rallied on safe-haven buying. The move into lower-yielding assets was fueled by reports that North Korea’s Foreign Minister Ri Yong Ho, accused President Trump of declaring war on the rogue nation.

Ri was reacting to American bombers flying in international airspace east of North Korea in a symbolic show of military force on Saturday. He also said that North Korea could target planes even when they are not flying in North Korean airspace.

U.S. stocks sold off on the news affecting the carry trade which made the Japanese Yen a more attractive asset. U.S. Treasury yields were also down, limiting gains in the U.S. Dollar.

Earlier Monday, Japanese Prime Minister Shinzo Abe ordered his cabinet to compile new economic stimulus measures in a package worth around 2 trillion yen ($17.80 billion) by the end of the year.

Abe told his top advisory panel that the package should focus on subsidizing education, child-care costs, and on boosting corporate investments to improve productivity.

In a separate speech later in the session, Abe called for an election a year early and said he would dissolve parliament on Thursday. He added that he was seeking a fresh mandate to overcome “a national crisis” amid rising threats from North Korea.

Abe did not set a date for the vote but most believe it to be October 22. Speculation is that he called for the election to capitalize on renewed popularity due to how he has handled the current situation with North Korea. In July, his ratings had dropped to less than 30% due to political scandals, but then recovered to above 50% in September.

Forecast

I expect the USD/JPY to continue to be headline-driven in the short-run with a huge emphasis on any news regarding the on-going conflict with North Korea.

The longer-term picture is potentially bullish because of the Fed’s recent hawkish tone. However, with the exception of its plan to begin reducing its balance sheet, the next rate hike in December is entirely data-dependent. Therefore, USD/JPY traders are going to have to continue to monitor key economic reports and Fed member commentary until then.

On Monday, Federal Reserve Bank of New York President William Dudley said the U.S. central bank should maintain its gradual pace of policy tightenings as temporary factors holding down price pressures fade. This signaled the Fed remains on track to raise interest rates again in December.

Chicago Fed President Charles Evans offered a more cautious perspective on Monday. Speaking in Grand Rapids, Michigan, Evans said that he was “broadly comfortable” with the median estimate of the Fed’s quarterly projections, which showed its overnight policy rate ending 2019 at 2.7 percent.

Evans also said, “We (the Fed) should avoid taking policy steps that could be misread as a lack of concern over the inflation outlook. In my view, that would be a policy misstep that would further delay achieving our inflation objective.”

Minneapolis Fed President Neel Kashkari said on Monday that he sees no need for the U.S. Federal Reserve to raise interest rates further as he sees no evidence recent weak inflation data is set to improve.

“When I look at the economy I don’t see any signs that the economy is close to overheating,” said Kashkari, a voter on the central bank’s rate-setting committee this year, during an appearance at the University of North Dakota. “I don’t see inflation taking off so I see no need to tap the brakes.”

On Tuesday, investors will get the opportunity to react to U.S. reports on housing, consumer confidence and manufacturing. FOMC Member Lael Brainard is also scheduled to speak at 1430 GMT.

The major market moving event today is likely to be Fed Chair Janet Yellen’s speech at 1645 GMT. Yellen’s speech is expected to be on “inflation, uncertainty, and monetary policy”. She could create volatility in the gold, Forex, Treasury and stock markets if she mentions anything about the timing of the next Fed rate hike.

The main trend is up according to the daily charts, however, it may be slightly overbought. This makes it vulnerable to near-term corrections. The catalyst behind these corrective moves is likely to be concern over geopolitical risks from North Korea.