USD/JPY Fundamental Weekly Forecast – Combination of No Stimulus, Weak Risk Appetite Keeping Prices in Check

The Dollar/Yen edged lower last week as the tug of war continued between these two safe-haven assets. In watching the price action, one probably observed that the U.S. Dollar strengthened when the fiscal stimulus talks reached another stalemate, and the Japanese Yen rose on stock market weakness. We expect to see this type of price action to continue this week and possibly into the U.S. Presidential election on November 3.

Last week, the USD/JPY settled at 105.405, down 0.225 or -0.23%.

In other news, Bank of Japan (BOJ) Governor Haruhiko Kuroda stressed a week ago this readiness to take additional monetary easing steps, saying the central bank had not run out of tools to cushion the economic blow from the COVID-19 pandemic.

Kuroda said Japan’s economy had hit the bottom in April-June and that the general picture looked ‘much better” than a few months ago, with exports, output and capital expenditure ‘fairly robust,” Reuters reported.

But consumption, particularly for services, was quite weak and likely to stay so far some time, unless the world gets hold of an effective vaccine to contain COVID-19, he added.

“We will closely monitor the impact of COVID-19 and not hesitate to take additional easing measures as necessary,” Kuroda told an online seminar hosted by the Institute of International Finance.

“The BOJ hasn’t run out of policy tools. We have a lot of policy tools to counter (the damage from COVID-19). We are flexible, innovative when considering measures to take.”

Kuroda also said Japan’s inflation rate would likely remain negative for some time as COVID-19 suppressed consumer demand “considerably”. But he added that prices would likely rebound next year as the economy recovered.

He also defended the BOJ’s negative interest rate policy, saying the -0.1% rate was imposed on only a limited portion of commercial banks’ reserves parked with the central bank.

“We maintain 10-year JGB yields around zero. But at the same time, 20-, 30- 40- year JGB yields are quite positive,” Kuroda said. “We have been allowing longer-term interest rates to move in a positive range. That would certainly help pension funds, life insurance companies and institutional investors.’

Weekly Forecast

All eyes will remain on a possible U.S. fiscal stimulus deal and risk appetite. New stimulus is coming, but probably not ahead of the election. If the White House, Republicans and Democrats can’t reach an agreement then look for a smaller package shortly after the election on November 3.

If Joe Biden wins the election then look for an even bigger stimulus deal early next year.

Negative fiscal stimulus news will be supportive for the U.S. Dollar because this will mean fewer greenbacks floating around in the system. A weaker U.S. stock index will likely pressure the USD/JPY as this would boost the safe-haven appeal of the Japanese Yen.

For a look at all of today’s economic events, check out our economic calendar.

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James Hyerczyk

James A. Hyerczyk has worked as a fundamental and technical financial market analyst since 1982. His technical work features the pattern, price and time analysis techniques of W.D. Gann.