USD/JPY: forecast for October 5-11

The main event for Japanese yen next week will be the Bank of Japan’s meeting on Wednesday.

The central bank’s Tankan survey showed that sentiment among big Japanese manufacturers slipped in Q3. At the same time, other indicators, such as prospects for profits and plans for construction spending, were positive, providing some hope for the economy. The survey does not point at an unambiguous necessity for the Bank of Japan’s monetary stimulus. The recent comments from the BOJ show that Governor Kuroda still believes that the nation’s economy is on track for inflation, so the regulator does not have to increase quantitative easing (QE), which currently expands the monetary base at an annual pace of 80 trillion yen ($666 billion). However, there are wide fears that Japan may slip in technical recession this year because of falling exports to China and other emerging markets.

Despite Kuroda’s comments, many market players believe that the Bank of Japan will act in October. Investors remember Kuroda’s tactics of big surprise he used last year, when he expressed confidence in Japanese economy and then suddenly dropped the bomb of large QE.

If the central bank does not deliver easing, USD/JPY will make a short-term voyage down, to the 117.00 area and probably to 116.50/00. Surprise easing contrary to Kuroda’s promises, on the other hand, will send dollar/yen to 122.50/123.00 area. Next big resistance in this case will be at 124.80 (trend line from June highs).

Note also that there will be another meeting of Japanese regulator on October 30. This meeting will be accompanied by the release of the BOJ’s economic outlook. If the Bank of Japan chooses to ease policy in October it will more likely choose the end of the month. This is why our main scenario is that the BOJ will keep policy unchanged next week. All in all, the likely lack of easing from the Bank of Japan together with the weak US NFP data makes us bearish on USD/JPY.

Daily USD/JPY

If the Bank of Japan chooses to leave the bond-buying program unchanged, it may decide to inject money into the economy via stock market increasing the amount of exchange-traded funds it purchases. This, in turn, will be a great opportunity to invest in Japanese stocks, for example through CFD on Nikkei 225 index futures.