Fundamental Forecast for Yen:Neutral
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The range-bound price action in USD/JPY may unravel in the week ahead should the fundamental developments coming out of the U.S. economy dampen bets for a 2015 Fed rate hike, while the Bank of Japan (BoJ) is widely expected to retain a wait-and-see approach at the October 7 interest rate decision.
Even though the Federal Open Market Committee (FOMC) keeps the door open to raise the benchmark later this year, the data prints coming out of the world’s largest economy may continue to drag on interest rate expectations and sap demand for the greenback as the ISM Non-Manufacturing survey is expected to show a further slowdown in service-based activity. The ongoing slack in the real economy accompanied with the disinflation environment may push the ‘data dependent’ central bank to adopt a more dovish outlook for monetary policy, and the Fed Minutes may do little to shore up the greenback as Chair Janet Yellen remains in no rush to remove the zero-interest rate policy (ZIRP).
In contrast, market participants may continue to scale back their bearish outlook for the Japanese Yen as the BoJ is widely expected to retain its current policy, and the fresh commentary coming out central bank may sap speculation for a further expansion in the quantitative/qualitative easing program (QQE) as Governor Haruhiko Kuroda remains confident in achieving the 2% inflation target over the policy horizon. However, a material shift in central bank rhetoric may fuel speculation for additional monetary support at the October 30 interest rate decision as Japanese lawmakers look for a more accommodative policy stance, and comments foreshadowing a larger asset-purchase program may act as a key catalyst to spark a topside break in USD/JPY amid the deviating paths for monetary policy.
In turn, risk trends may heavily impact USD/JPY ahead of the key event risks next week as global investors treat the Japanese Yen as a ‘funding-currency,’ and the pair may threaten the range-bound price action carried over from September should we see a material shift in the policy outlook surrounding the Fed & BoJ.