Weekly USD/JPY Outlook: A Respite Before Yen’s Decline

The USD/JPY has traded sideways in five days, as the Bank of Japan’s dovishness clashed with the Federal Reserve’s projected disclosure of bond tapering next Wednesday. Investors have been reluctant to bet strongly on the project’s imminent demise because the size and duration of the buy cut are unpredictable, and US bank executives have offered little advice. The USD/JPY rose only 0.2% this week, from 113.52 to 114.04, despite the FOMC’s September 22 meeting.

US Treasury yields soared while JGB rates remained flat. The Bank of Japan kept its ultra-loose fiscal and monetary program in place, keeping its primary rate at -0.1% since 2016. Inflation in Japan is unlikely to reach the levels seen in other nations, according to BoJ President Hiroki Kuroda. The bank reduced its 2019 GDP forecast from 3.8 percent to 3.4 percent, and its 2020 inflation forecast from 0.6 percent to neutral.

The BoJ Policy Flexibility

Mr. Kuroda said a weaker currency is “absolutely helpful” for the Japanese economy, echoing Tokyo’s long standing monetary policy. The BoJ is also likely to add to its huge policy flexibility. The core CPI fell 0.4 percent in September, missing the -0.1 percent forecast. The CPI rose in September for the first time in a year, after seven months of flat or declining core CPI. Tokyo’s consumer prices rose due to increasing energy and food expenses; without these rises, Japanese rates would have fallen into deflation.

September industrial production fell 5.4 percent, compared to the expected 3.2 percent drop. It was the fourth dismal month in a row. In September 2020, manufacturing output declined 9%.

The third-quarter annualized Gross Domestic Product (GDP) was 2%, well below the 2.7 percent forecast and down from the previous 6.7 percent. Manpower and production constraints have slowed the US recovery, while high consumer demand has increased inflation. Total personal consumption expenditures (PCE) increased to 4.4 percent in September from 4.2 percent the previous month, while the core rate remained at 3.6%.

Forecasts For The USD/JPY

The USD/two-week JPY’s fall is a breather before fundamentals renew Yen weakening. US Treasury rates are rising. The ascent’s speed is unpredictable, but not its direction. The financial markets are wary of the expected bond taper after being burned by the Fed’s year-long monetary pause. It should conclude next Wednesday. However, it is still 14 basis points (bps) below the March 31st, 2021 peak of 1.746 percent.

To bears, the increasing difference between the US and Japanese levels should be intractable after the Fed discussion is over. Less than expected monthly bond purchases of $120 billion will be a big bullish indication for Greenback. The only noteworthy Japanese report this week is September’s Overall Household Expenditure.

Besides the Fed’s announcement on Wednesday, the US has plenty of data. The lower third-quarter GDP is expected to be reflected in the PMIs. Despite the recent setbacks, October Nonfarm Payrolls are expected to rise sharply. The appointment of Prime Minister Kishida will release further Yen-weakening fiscal stimulus, and the BoJ has endorsed a weaker Yen.

USD/JPY CHART Source: Tradingview.com

Since Friday’s low of 114.000, the USD/JPY has been volatile. The momentum signals highlight the absence of direction. Wednesday’s MACD (Momentum Average Convergence Divergence) signaled a sell signal, but the RSI (Relative Strength Index) is slightly above overbought and went up on Friday. As transaction volume fell, so did the True Range. These indications point to a strengthening USD/JPY.