USD/JPY Fundamental Weekly Forecast – Traders Will Be Eyeing Simmering US-China Relations

The Dollar/Yen rose last week with increased demand for risky assets driving the price action most of the week. Gains were capped late in the week as investors sought protection in the Japanese Yen due to simmering tensions between the United States and China.

With the spread between U.S. 10-year Treasury Notes and Japanese Government Bonds extremely tight, the price action in the Forex pair is likely to be primarily influenced by risk sentiment.

Last week, the USD/JPY settled at 107.615, up 0.445 or +0.42%.

Positive for the U.S. Dollar will be demand for risky assets. Risk sentiment is likely to rise as more countries report optimistic coronavirus results and countries continue to loosen lockdowns and restrictions. Furthermore, any news regarding successful vaccine results are also expected to underpin the Dollar/Yen.

Stock market weakness and a second-wave of coronavirus outbreaks could weaken the Forex pair. However, the primary concern for investors is likely to be an escalation of tensions between the United States and China.

Bank of Japan Launches New Loan Scheme

The Bank of Japan decided on Friday to launch a new lending facility that aims to channel more funds to small and midsize businesses suffering from the economic blow of the coronavirus pandemic.

In an emergency policy meeting, the central bank also extended the deadline for a series of measures it has deployed to combat the virus fallout, including accelerated corporate debt buying, by six months to March 2021.

As widely expected, the BOJ kept monetary settings unchanged including its short-term interest rate target of -0.1% and a pledge to guide the 10-year government bond yield around 0%.

In an outline of the scheme released in April, the BOJ had said the new facility would offer zero-interest loans to financial institutions that boost lending to small firms by tapping government guarantee programs. It also offered to pay 0.1% interest to lenders that boost such loans.

Weekly Forecast

Risk sentiment will drive the USD/JPY this week as ties between the U.S. and China come under further strain, potentially threatening the “Phase One” trade deal signed earlier this year.

Tensions between the world’s two largest economies have flared on multiple fronts in recent days. China is poised to impose a new national security law in Hong Kong following months of anti-government protests, raising further questions about Beijing’s control over the city and likely evoking the ire of the U.S. and other Western powers which supported pro-democracy protesters.

Already engaged in a blame game over the coronavirus pandemic, discord between Washington and Beijing has spilled over into the financial markets last week after the U.S. Senate passed legislation last Wednesday that could restrict Chinese companies from listing on American exchanges unless they abide by U.S. regulatory and audit standards.

A Chinese government official said last Thursday that Beijing will not flinch in the face of any escalation of tensions with the U.S., but stressed that economic recovery and cooperation should be the priority, according to Reuters.

For a look at all of today’s economic events, check out our economic calendar.