USD/JPY Fundamental Weekly Forecast – Heightened Volatility Expected as Trump’s Health Remains at Forefront

The Dollar/Yen edged sideways-to-higher early as investors prepared for a normal trading week, positioning themselves ahead of the U.S. Non-Farm Payrolls report, but conditions changed on Friday when President Donald Trump announced he had contracted COVID-19. The news triggered a textbook response in the financial markets with investors dumping stocks and moving money into the safe-haven Treasury Bonds, U.S. Dollar and Japanese Yen.

Last week, the USD/JPY settled at 105.335, down 0.222 or -0.21%.

After the initial plunge into 104.944, the Dollar/Yen was able to recover about half of its earlier losses, suggesting investors were betting on a recovery by the President.

Economic news from Japan was mixed last week, but mostly better than expected. Nonetheless, it wasn’t strong enough to sway the market from anticipating additional stimulus support from the government and the Bank of Japan.

On the positive side, Tokyo Core CPI, Preliminary Industrial Production, Final Manufacturing PMI and Consumer Confidence, all beat expectations. Retail Sales and Housing starts also came in better than the forecast, but remained in negative territory.

Although the Tankan Manufacturing Index and Tankan Non-Manufacturing Index came in worse than the estimate, it still marked an improvement from the previous readings.

Business sentiment improved in July-September from an 11-year low hit three months ago, the Bank of Japan’s key survey showed Thursday, in a sign the economy is gradually emerging from the devastating hit from the coronavirus pandemic. The data offered some hope for new Prime Minister Yoshihide Suga’s efforts to achieve an economic revival from the crisis and pave the way for hosting next year’s Tokyo Olympic Games.

But factory activity remained shaky and corporate capital expenditure plans were at their weakest since the 2009 global financial crisis, underscoring the challenge of pulling the world’s third-largest economy sustainably out of its slump.

Manufacturers and non-manufacturers expect business conditions to improve three months ahead, the tankan showed.

Weekly Outlook

There is not much economic news from Japan this week, but in the U.S., investors will get the opportunity to react to comments from Federal Reserve Chairman Jerome Powell and the FOMC meeting minutes. Nonetheless, the health of President Trump will likely dominate the news since it will have an effect on the election results, the chances of a stimulus plan and essentially, investor demand for risky assets.

The release of the Fed minutes could be a market moving event on Wednesday. Although there may be a difference in options from policymakers, most are likely to agree that the next phase of the recovery is likely to be the hardest.

Based on the events over the week-end, President Trump’s health has become a day-to-day situation so a weeklong forecast is difficult at this time. However, we are confident that risk appetite will be the catalyst behind the price action. #USD/JPY##FX#

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