USD/JPY Fundamental Weekly Forecast – Don’t Be Surprised by BOJ Intervention as Dollar/Yen Nears 104

This week’s price action in the Dollar/Yen will continue to be dictated by investor demand for safe-haven protection, but don’t be surprised if the Bank of Japan steps in to stop the Japanese Yen’s rapid rise. There is only one major report this week from the U.S. and nothing significant from Japan. U.S. Consumer Inflation is expected to come in at 0.0% and Core Consumer Inflation is expected to have risen 0.2%. Both reports should not influence the price action unless they come in negative.

Last week, the USD/JPY settled at 105.534, down 2.710 or -2.51%.

Japan’s Economy is Fragile

Even before the coronavirus hit the global economy, Japan’s economy was on shaky ground. The recent GDP figures and expectations of a weaker economy have most economists predicting a recession in the country.

Since the country relies on exports to drive its economic machine, it can’t afford to have a strong Japanese Yen. The Yen is rising because U.S. Treasury yields are plunging, especially after the U.S. Federal Reserve made an emergency 50 basis point rate cut last week.

Plummeting U.S. interest rates has tightened the spread between U.S. Government bonds and Japanese Government bonds, making the Japanese Yen a more attractive asset. With the tightening of the spread, the Yen is losing its appeal as a carry currency. Investors no longer feel the need to borrow from Japanese banks, sell Japanese Yen and buy the U.S. Dollar while investing in U.S. stocks. In fact, they are doing just the opposite during this latest round of stock market weakness.

Weekly Forecast

The USD/JPY is starting to get into territory where the Bank of Japan will have to intervene to weaken the Japanese Yen. This could be near 104.000. So keep an eye on the price action and read the order flow as we approach this level. We could see a sudden turnaround in the Dollar/Yen that could catch you off guard. My suggestion is to trade defensively this week as we wait for the BOJ to possibly make its move.

They could make a move direction in the Forex market, or they could make a surprise monetary policy decision like lowering their benchmark interest rate. I’m not sure they will want to do that with rate already negative.