Fundamental Forecast for JPY: Bearish
USDJPY Analysis and Talking Points:
- Record High US Equity Markets Keeps JPY on the Backfoot
- Key Risk Events Include: FOMC, US-Japan Trade Talks and Trump-Abe Summit
The Japanese Yen had another soft week, with the currency losing 0.5% against the US Dollar. The fundamental theme alongside the technical set up suggest that the recent weakness is set to continue. During the past week, the BoJ stuck to its ultra-loose monetary policy stance, reiterating the message that the BoJ will continue QQE until the 2% inflation target is reached. With core inflation running at sub 1%, this suggests that the exit is not expected for some yet. Consequently, US-JP bond spreads have continued to widen with the US 10yr pushing back above the key 3% level, which in turn has pushed USDJPY towards the 113.00 handle. For the upcoming week, we remain bearish on the Japanese Yen.
The beginning of the week will see the $200bln worth of tariffs on Chinese goods come into effect with a levy rate of 10%, as opposed to previously touted 25%. With price action somewhat muted for the Japanese Yen upon the announcement from the Trump administration, it is likely that the imposition will also be met with a muted reaction. Elsewhere, with the US equity markets printing fresh record highs, risks to USDJPY remain tilted to the upside as risk trends continue to spur outflows from the Yen.
The recent rise in USDJPY faces a big test this week amid a slew of key risk events, which include the Federal Reserve rate decision, US-Japan trade talks and a summit between Trump and Abe. With the Federal expected to raise rates at the upcoming meeting and reaffirm its current rate path, the JPY is vulnerable to slipping past 113 against the Dollar. Markets will be closely watching the progress made with trade talks between the US and Japan in which failure to make progress could halt the USDJPY rise.
USDJPY PRICE CHART: DAILY TIMEFRAME (April-September 2018)
On the daily timeframe the bias continues to suggest that further upside is to be had in the pair following the breach above the 76.4% Fibonacci Retracement at 112.36. Consequently, the upside targets are at the psychological 113 handle before a test of the July peak at 113.17.
JPY TRADING RESOURCES:
- See our quarterly JPY forecast to learn what will drive prices through mid-year!
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--- Written by Justin McQueen, Market Analyst
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