Japanese Yen and Aussie Dollar Forecast: BoJ Chatter and US PMI Keep USD/JPY in Focus

Japan’s Stock Investment by Foreigners: Key Insights for USD/JPY

On Friday, January 3, trends in Japan’s investment by foreigners for the week ending December 28 will take center stage, placing the USD/JPY in the spotlight. During the week ending December 21, Foreign declined by ¥1,022.6 billion. Additionally, foreign bond investments dropped by ¥919.2 billion in the same week.

Foreign investment trends are significant since they influence the USD/JPY supply-demand balance. Analysts view foreign investment patterns as a barometer of economic sentiment, offering insights into Japan’s economic outlook.

The release of the data coincides with heightened speculation about a January Bank of Japan rate hike. However, the BoJ and December’s Summary of Opinions failed to provide clear signals.

While some board members supported a December hike, Governor Ueda emphasized the need for more wage growth data and time to assess the effects of Trump’s policies. Governor Ueda’s comments dismissed a January move unless economic indicators say otherwise. The BoJ’s policy outlook is again uncertain, exposing the USD/JPY to potential volatility.

Traders should stay alert for BoJ commentary, as forward guidance will remain critical ahead of the January 24 monetary policy decision.

Expert Views on the Bank of Japan’s Mixed Signals

Neil Sethi, Managing Partner at Sethi Associates, highlighted the contrasting tones between BoJ members and Governor Ueda, saying,

“Minutes from the Bank of Japan’s Dec meeting indicate a ‘lively discussion over the timing’ of a potential rate hike with several BoJ members pushing for one in December. The comments contrast with the more cautious tone from Gov Ueda last week. The Yen strengthened a bit after falling to the least since July on Thursday. Overnight swaps on Friday pointed to a 42% chance of a January move, with bets on a hike by March reaching 72%.”

Rising bets on a January interest rate hike could pull the USD/JPY pair toward 155. Conversely, dovish BoJ chatter may weaken the yen, driving the pair toward 160 and potentially triggering intervention threats.

USD/JPY Trends: US Manufacturing in Focus

Turning to the US session, the manufacturing sector will be in the spotlight. Economists expect the US ISM Manufacturing PMI to remain at 48.4 in December. A move above the 50 neutral level and upward trends in prices and employment may temper bets on a Q1 2025 Fed rate cut.

A less dovish Fed rate path may drive the USD/JPY pair toward 160 and the 161.920 resistance level. Conversely, weaker-than-expected data could drag the pair below the 156.884 support level, bringing the 50-day EMA into sight.

AUD/USD: the RBA and China’s Economic Influence

Shifting our focus to the Australian dollar, the AUD/USD pair remains under pressure amid speculation of a February RBA rate cut.

With the Fed signaling a more hawkish rate path, a February RBA rate cut would widen the US-Australian interest rate differential in favor of the US dollar. A more dovish RBA, combined with concerns about the effects of US tariffs on China, could impact Aussie dollar demand further.

Investors should track RBA chatter and stimulus-related news from Beijing. While the main driver remains sentiment toward interest rate differentials, China remains a key Australian trade partner.

China accounts for one-third of Australian exports. With a trade-to-GDP ratio of over 50% and 20% of its workforce in trade-related jobs, weaker demand from China would affect the Aussie economy and AUD/USD pair.

In December, RBA Governor Michele Bullock underscored the importance of China’s economy, saying,

“US moves against China could affect Aussie trade terms with China, potentially impacting the Aussie economy.”

For a comprehensive analysis of AUD/USD trends and trade data insights, visit our detailed reports here.

Australian Dollar Daily Chart

US Manufacturing PMI data will influence the AUD/USD interest rate differential. Rising manufacturing sector activity, prices, and employment would support a more hawkish Fed rate path.

A wider US-Australian interest rate differential, favoring the US dollar, could drag the AUD/USD pair to the lower trend line. Conversely, an unexpected slump in the ISM Manufacturing PMI may raise expectations of a Q1 2025 Fed rate cut. A more dovish Fed rate path could drive the AUD/USD pair toward the crucial $0.63 level and the upper trendline of the descending channel.

Global Market Trends: A Trader’s Guide

Central bank forward guidance remains critical for the AUD/USD and USD/JPY as 2024 unfolds. Upcoming BoJ and RBA meetings, along with economic indicators such as Services PMIs, inflation, and labor market data, could drive market volatility. Additionally, developments in US tariffs and China’s stimulus measures will significantly impact global market trends.

For comprehensive insights into these market movements, explore our in-depth reports here.