USD/JPY Fundamental Weekly Forecast – Are Longer-Term Investors Unwinding Long Dollar, Short Yen Positions?

The Dollar/Yen finished lower last week for the fourth week out of five as investors pumped money in the Japanese Yen due to safe haven buying related to the financial crisis in Turkey and its impact on emerging markets. Falling U.S. Treasury yields helped tighten the spread between U.S. Government bond yields and Japanese Government bond yields, making the dollar a less-attractive asset. Speculators also continued to increase bets the Bank of Japan was moving closer to exiting its ultra-soft monetary policy.

The USD/JPY settled the week at 110.506, down 0.427 or -0.38%.

The selling pressure started early in the week as economic troubles in Turkey gripped global financial markets. Stock markets fell and money flowed into the Japanese Yen as investors scrambled for protection while trying to determine how far the crisis would spread. At times, fear of contagion gripped the market. Traders felt that conditions would eventually lead to an even bigger event.

Traders were primarily reacting to Turkey President Recep Tayyip Erdogan’s defiance toward both the U.S. and financial-market protocol in speeches that heightened concern that the financial problems would spread to other market. Although a calm came over the market at mid-week due to a series of moves by Turkey to slow down the short-selling of its currency and to boost liquidity, the threat of more U.S. economic sanctions unless Turkey hands over detained American evangelical pastor Andrew Brunson is expected to hang over the markets at the start of trading on Monday.

This week’s lower-level trade talks between China and the United States offers some hope that the two economic powerhouses will find a way to head off a full-blown trade war. This could help limit losses by the USD/JPY if it leads to increased demand for higher risk assets.

However, the prospect of higher inflation encouraging the Bank of Japan to move away from their ultra-loose monetary policy could continue to sustain the weakness in the Forex pair if investors maintain a bid under the Japanese Yen.

Forecast

Looking at the price action since the last Bank of Japan monetary policy meeting and reading the BOJ minutes indicates the USD/JPY could be going through a transition period. For investors, this will mean a change in the way the Forex pair has been trading for several years. As investors start to unravel short Japanese Yen positions, the carry trade, for example, may not work like it had been. The best sign that this transition is taking place will be a lower USD/JPY and a higher stock market.

Dollar/Yen trader reaction to this week’s events could offer further insight into whether there is a transition from weak Yen to strong Yen taking place.

There are no major economic reports this week in Japan. U.S. economic data that could fuel a reaction in the dollar includes Existing Home Sales, Durable Goods reports and the release of the Federal Open Market Committee meeting minutes on Wednesday.

Global central bankers will be at the forefront this week also with the start of the Jackson Hole Symposium on Thursday. Investors will be looking for comments on inflation, interest rates and the threat of a global recession due to the numerous trade disputes taking place at this time. Of particular interest could be the state of the emerging markets. The central banks could also talk about stock market volatility and the general unrest in the global economy led by an economic collapse in Venezuela and the currency collapse in Turkey.

This week, a resumption of the turmoil in Turkey and emerging markets will likely pressure the USD/JPY. If conditions improve and the USD/JPY continues to decline then this will tell us that the Forex pair is also being influenced by other factors.

Traders will also be monitoring the talks between the U.S. and China. If they end with a favorable outcome and the USD/JPY fails to respond then this will be further evidence that investors are unwinding Long Dollar, Short Yen positions.