USD/JPY Weekly Fundamental Analysis, August 31 – September 4, 2015 Forecast

Weekly Analysis and Recommendations:

The USD/JPY finished slightly lower last week with the price action primarily driven by the carry trade. The Forex pair broke sharply early in the week as the collapse in the global equity markets drove investors out of higher risk investments into lower-yielding assets. 

The recent turbulence in the equity markets has helped drive up the Japanese Yen, erasing some of the work achieved by the Bank of Japan stimulus. Although the Japanese Yen weakened throughout the week as the stock market regained its composure, there are some investors out there who believe the BoJ may be poised to implement another round of stimulus to help drive down the value of the Yen in an effort to generate more exports. 

As long as there is risk in the financial system especially the equity markets, there is likely going to be a lid kept on the USD/JPY, but once the volatility starts to fall, the Forex pair is likely to rise. However, if it begins to trade sideways-to-lower then look for possible help from the BoJ since it wants to see a lower Yen. 

Fundamentally, the recent economic news out of Japan has been in line with expectations, but it’s the volatility in the highly correlated stock market that could derail the central bank’s plan for a weaker Yen. Therefore, lower equity markets will likely lead to additional support from the BoJ. 

Besides the recovery in the equity markets, stronger-than-expected U.S. durable goods and GDP reports helped underpin the USD/JPY. This trend could continue if the U.S. posts stronger-than-expected ISM Manufacturing and employment data this week. 

There is still the possibility of a Fed rate hike in September, but only about 24% of investors support this idea. The central bank may decide to pass on a rate increase at this time because of the turmoil in the financial markets. However, if volatility drops and the economy continues to improve then it will likely raise rates before the end of the year. This would be supportive for the Dollar/Yen. 

This week, the USD/JPY will once again be influenced by the movement in the equity markets. If stock investors continue to respond positively to the stimulus measures implemented by China last week then look for further upside action by the currency pair. If another risk-off scenario develops then look for the Forex pair to weaken, but be prepared for action by the BoJ if the USD/JPY drops below 116.00. 

Empire provides in-depth analysis for each currency and commodity we review. Fundamental analysis is provided in three components. We provide a detailed monthly analysis and forecast at the beginning of each month. Then we provide more recent analysis and information in our weekly reports. 

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