USD/JPY Fundamental Daily Forecast – On Tap, Bank of Japan Core CPI

The Dollar/Yen trended higher throughout the session on Monday as investors primarily ignored U.S. stock market weakness and lower Treasury yields. The move came as somewhat as a surprise since these factors had led to flight to safety buying into the Yen recently. Investors were likely focused on Bank of Japan inflation data which comes out early Tuesday.

A strong recovery in China’s equity markets may have helped generate some support for the Dollar/Yen because it eased concerns over a stock market meltdown in China which would have fueled safe-haven buying of the Yen.

The USD/JPY settled higher on Monday at 112.822, up 0.288 or +0.26%.

On Monday, the Shanghai Composite added 4.09 percent to close at around 2654.88. The Shenzhen composite gained 4.899 percent to close at about 1325.73. The rallies were fueled as authorities took steps to support the market after the release of weaker-than-expected GDP data.

The major U.S. stock indexes finished mixed on Monday with the tech-based NASDAQ Composite posting a gain and the benchmark S&P 500 Index and blue chip Dow Jones Industrial Average settling lower for the session.

U.S. Treasury yields retreated on Monday as concerns about a volatile sell-off in the stock market tempered gains. The benchmark 10-year U.S. Treasury yield fell to 3.194 percent, while the yield on the 30-year Treasury bond fell to 3.384.

There were no reports from the U.S. on Tuesday. The major reports come later in the week in the form of Durable Goods and Advance GDP.

Japanese All Industries Activity improved 0.5%, up from 0.0% a month earlier. The new reading was a little better than the estimate of 0.4%.

Forecast

We’re not expecting much movement in the Dollar/Yen ahead of Tuesday’s BOJ Core CPI report, the preferred indicator of the Bank of Japan.

Dollar/Yen investors will continue to keep an eye on relations between China and the U.S., as the trade dispute between the two economic powerhouses shows no signs of letting up.

Investors are also reacting to the divergence between the monetary policies of the hawkish U.S. Federal Reserve and the dovish Bank of Japan. This along with the widening of the interest rate differential between U.S. Government bonds and Japanese Government bonds is helping to make the U.S. Dollar a more attractive investment.

The Bank of Japan’s unorthodox monetary policy has kept interest rates at ultra-low levels while cutting into the profits of many financial institutions, but the BOJ has no plans to alter course. The central bank recently released its semiannual financial system report, which noted that the financial sector shows no signs of overheating and that banks continue their “active lending attitudes”.

Additionally, the BOJ is showing no signs it is willing to change its policy over the near-term. It is unlikely to make any policy changes before 2020, aside from some minor housekeeping moves. The Bank of Japan is set to meet on October 30 – 31 for the next policy meeting.

The Dollar/Yen’s only threat at this time is safe haven buying into the Japanese Yen due to volatility in the U.S. stock markets.