USD/JPY Fundamental Daily Forecast – Weak PMI Data Likely Increases Need for BOJ Stimulus

The Dollar/Yen is trading slightly higher and in a tight trading range on Tuesday. Volume is also well-below average. The lack of fresh economic news is helping to curtail the recent volatility. The catalysts behind the move are a slight rise in U.S. Treasury yields and firmer demand for U.S. equities.

At 09:10 GMT, the USD/JPY is trading 107.672, up 0.129 or +0.12%.

On the data side, Japanese manufacturing activity shrank at the fastest pace in seven months in September, underscoring the broadening economic impact of the U.S-China trade dispute and likely escalating the need for policymakers to step up stimulus.

The Jibun Bank Flash Japan Manufacturing Purchasing Managers’ Index (PMI) fell to a seasonally adjusted 48.9 from a final 49.3 in the previous month, marking the quickest pace of deterioration since February.

The key report painted a bleak picture of the manufacturing sector, which likely increasing the need for the Bank of Japan to add to its massive stimulus.

Last week, the BOJ indicated in its monetary policy statement that it was already moving toward a rate cut at its October 31 meeting, warning about overseas risks.

BOJ’s Kuroda Speaks

Despite the weak PMI data, its governor Haruhiko Kuroda said on Tuesday the Bank of Japan has no preset idea on whether to expand stimulus next month, suggesting that the decision will depend on market moves and the economy’s resilience to overseas risks.

Kuroda also said the BOJ will continue to seek ways to make its yield curve control (YCC) policy more sustainable, as years of ultra-low interest rates could discourage financial institutions from boosting lending by straining their profits.

“If the current low-interest rate environment is prolonged further, it will become necessary to pay closer attention to the cost of our policy,” Kuroda said in a speech to business leaders in Osaka, western Japan.

As such, the important challenge we continue to face would be to think about what’s necessary to further enhance the sustainability of our policy,” he said.

“As risks regarding overseas economy are heightening, we need to be increasingly vigilant to the chance the overseas slowdown could affect Japan’s economy and inflation,” Kuroda said.

“The situation has been changing rapidly, with investors’ risk aversion abating somewhat due to expectations for progress in the U.S.-China trade negotiations,” Kuroda said.

“Let me also add that the BOJ does not have any preconception at this point” on what policy steps it could take at October rate review, he added.

Daily Forecast

At 14:00 GMT, investors will get the opportunity to react to the latest Conference Board Consumer Confidence report. It is expected to come in at 134.1, down slightly from 135.1.

A weaker than expected number could weaken the Dollar/Yen, but the extent of the weakness will be determined by how Treasury and stock market investors react.

If yields fall along with stocks then look for the Dollar/Yen to be pressured. Stronger than expected consumer confidence data will underpin the Forex pair.

However, with the Fed likely to pass on an October rate cut and the BOJ likely to cut, we’re looking for the widening interest rate differential to favor the U.S. Dollar over the Japanese Yen.