USD/JPY: headed towards 109 on disappointing FOMC minutes

There has been a lot that has been factored into USD/JPY over these past weeks, most of which has centred, or at least, focussed, around EMs, contagion risks because of the TRY crisis, the implications to EMs around the Fed's tightening path and strength of the dollar and trade wars. 

During the phase where the dollar ran rampant across the board during the height of the Turkey currency crisis scare, (and prolonged angst over US/Chinese trade relations), the yen fared up relatively well given its own safe-haven appeal. However, there is more to it than that. Senior economist at ABN Amro, Bil Diviney, noted that it has taken enormous monetary firepower, but the Japanese authorities appear – finally – to be winning the battle against deflation. 

He adds that modestly above-trend growth has helped close the output gap, and productivity growth is outperforming other advanced economies while the tight labour market is finally lifting wage growth, and inflation is following – with a lag. His team expects the BoJ to continue its ‘stealth’ normalisation of monetary policy, with a close eye on the yen exchange rate. They look for the yen to strengthen to 100 vs the USD by end-2019:

 "The 107 level is important, as it is the average rate predicted by large manufacturers in the Q2 2018 Tankan survey. We think USD/JPY would have to fall below 100 for the BoJ to shift from the normalisation path that it is currently on."

When are the FOMC minutes and how could they affect DXY?

For the day ahead, all eyes will be on the FOMC. They are likely to underpin the longer term trajectory of the bull trend in the dollar considering the Fed's optimism about the economy and their pledges that will be reinforced in today's minutes to continue to raise rates. 

• Fed Minutes and Jackson Hole Put Focus Back on Central Banks
• FOMC minutes to provide information on concerns regarding trade policy - Nomura

Besides the above, there is more than likely going to be another twist in the fate of the dollar and yen. On the announcement of yesterday’s guilty plea from Trump’s former attorney, Michael Cohen, on Federal charges, this initially sparked ‘mild’ demand for safe-haven assets and there is going to be more to follow as this all pans out, for Trump's legal woes could well sap up more attention from markets in time to come. 

USD/JPY levels

Valeria Bednarik, chief analyst at FXStreet explained, that from a short-term picture, the pair is bearish:

In the 4 hours chart, technical indicators have retreated for a second consecutive day from their midlines, maintaining downward slopes but above these days' low. In the meantime, the pair continues developing below its 100 and 200 SMA, with the shortest now around 111.00. An immediate support comes at around 110.00, with a break below it favoring a continued slide toward the 109.00 figure, a likely scenario in the case of disappointing Minutes."