Japanese Yen: Up or Down? Next Week Holds the Keys

Fundamental Forecast for Yen: Neutral

• Japanese Yen falls versus US Dollar, but lack of volume acts as clear warning

• Lackluster Consumer Price Index inflation data does little to improve JPY outlook

• For Real-Time retail FX positiong data, see our new FXCMApps indicator

It was a week of extremes for the Yen; first, a renewed sell-off in Chinese equity markets sent the safe-haven JPY higher. Yet a significant reversal in China and broader financial markets sparked a swift reversal and ultimately pushed the currency to fresh monthly lows (USDJPY).

We look to the coming week’s Bank of Japan monetary policy meeting as well as potentially critical US Nonfarm Payrolls report to drive short-term direction in the USDJPY and other Yen pairs.

Governor Kuroda and the Bank of Japan will amost certainly leave monetary policy unchanged at their upcoming meeting, but a key question is whether officials make overt reference to recent Japanese Yen weakness as a risk to the domestic economy.

The Yen surged (USDJPY tumbled) last month from ¥125 as Kuroda said the domestic currency’s effective exchange rate was already “very low” with little room to fall further. Yet a more recent report from Reuters quotes “sources familiar with [Kuroda’s] thinking” to say that the BoJ governor never intended to put a floor on the Yen and would prefer further weakness. It will be important to watch for any surprises, but ultimately the biggest volatility risk on offer is almost certainly the late-week US Nonfarm Payrolls report.

All eyes will focus on the US Bureau of Labor Statistics as they release data on US labor market gains for the month of July. A recent US Federal Reserve interest rate decision emphasized that the Fed stood ready to raise interest rates on continued improvement in labor market conditions. Needless to say, any surprises in NFPs could derail current market expectations for the future of Fed rate hikes.

The US Dollar remains relatively strong as interest rate traders predict the Fed will raise rates as early as September, but the official focus on data leaves risks clearly to the downside for the Greenback. This dynamic leaves the Japanese Yen especially exposed as it has historically been one of the most interest rate-sensitive currencies. Watch for outsized USD/JPY reactions to Friday’s NFPs data to guide overall direction through the foreseeable future.