USD/JPY Fundamental Weekly Forecast – Investors Responding to Attractive Japanese Yields

James Hyerczyk
·3-min read

The Dollar/Yen closed sharply lower last week as real interest rates fell in the United States relative to Japanese Government debt, making the yen a more desirable asset.

U.S. coronavirus aid headlines also drove the price action with most traders pricing in stimulus. Whether is comes before or after the election doesn’t seem to matter to investors at this point.

Last week, the USD/JPY settled at 104.703, down 0.702 or -0.67%.

Stimulus Update

It doesn’t make sense to retrace the stimulus headlines from last week. All one has to know is that they changed nearly every day and sometimes twice a day. Unless there is fresh news over the weekend, we think Friday’s comments will set the tone early this week.

On Friday, U.S. House of Representatives Speaker Nancy Pelosi said another round of COVID-19 aid was still a possibility before the November 3 elections, but that President Donald Trump would have to get reluctant Republicans on board if he wants a deal.

Meanwhile, Trump and Treasury Secretary Steven Mnuchin countered that Pelosi must compromise to get an aid package, saying significant differences remained between the Republican administration and Democrats.

So it looks like another stalemate has been reached, but we expect to see more adventures next week.

Traders Could Shift Focus to Presidential Election

Dollar/Yen traders are likely to shift their focus to the November 3 U.S. presidential election after President Donald Trump and Democratic challenger Joe Biden offered sharply contrasting views on the pandemic at the final presidential debate on Thursday.

Japan Economic News

Japan’s exports fell 4.9% in September from a year earlier, Ministry of Finance data showed on Monday, dropping at a slower pace than in the previous month as pressure from the coronavirus pandemic eases.

That compared with a 2.4% decline expected by economists in a Reuters poll and followed a 14.8% fall in August.

National Core CPI came in better than expected at -0.3%. Traders were looking for -0.4%.

Finally, Japan’s factory activity extended declines in October, a private sector survey showed on Friday, highlighting the impact a resurgence in global coronavirus infections has had on the world’s third-largest economy.

The contraction in manufacturing is at risk of extending further as new infections throw cold water on hopes of an export-led recovery for the trade-reliant economy.

The au Jibun Bank Flash Japan Manufacturing Purchasing Managers’ Index (PMI) edged up to 48.0 in October from a final 47.7 in the previous month, staying below the 50.0 threshold that separates contraction form expansion for an 18th month.

Weekly Forecast

Progress toward a stimulus deal should put further pressure on the USD/JPY this week, but the focus is likely to shift toward the November 3 presidential election.

A Biden victory, which polls predict, will probably drive further dollar weakness, because he is expected to spend more on coronavirus aid than Trump.

On Wednesday, the Bank of Japan will release its Outlook Report and Monetary Policy Statement.

The major report out of the U.S. will be Thursday’s quarterly Advance GDP.

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

This article was originally posted on FX Empire