Third Quarter Fundamental Forecast: Japanese Yen, USD/JPY, Fed, Inflation, Inelastic Travel Demand The decline in the value of the Japanese yen slowed in the second quarter, but the path ahead remains difficult. A less dovish Federal Reserve remains a significant upside catalyst for USD/JPY. Travel demand is inelastic, and vaccination rates are likely to keep US inflation high. Download our free 3Q trading advice from the DailyFX Free Trading Guides to read the full Japanese Yen forecast, including the technical outlook! Second-Quarter Recap: The Dominant Downtrend in the Japanese Yen Slows Before the third quarter, the Japanese Yen spent most of its time declining against its major peers, as predicted by the second-quarter fundamental forecast. However, compared to the first quarter, the rate of depreciation has decreased noticeably. Due to a prolonged drop in stock market volatility, the anti-risk currency is unlikely to attract much attention. While there have been some transient spikes in global sentiment, a long-term trend has been noticeably missing. The Yen could benefit from a resurgence in volatility, but continued loose monetary policy throughout the world could keep market sentiment from deteriorating significantly. Rather, the Yen will be closely watched for changes in government bond yields. TradingView created a Japanese Yen Index based on majors vs bond yields and a USD/JPY chart. The Yen Faces a Difficult Road My majors-based Yen index can be seen closely following spreads between Japanese and US 10-year government bond rates in the chart above. Japanese bond rates made a tiny return against their US counterparts in the second quarter. This comes as the Federal Reserve reaffirmed its dovish position, assuaging fears of earlier-than-expected tapering. However, following the Fed’s rate decision in June, more members are beginning to believe that a rate hike is approaching. Expectations of policy tapering will most likely be pushed ahead as a result of this. This is understandable given the world’s largest economy’s rising inflationary pressures. The central bank, on the other hand, sees near-term CPI improvements as primarily ephemeral. But, what if price pressures remain high? Will Inflation in the United States Remain Relatively High? According to a survey performed on behalf of Discover Financial Services, 70% of Americans have a ‘pent-up’ urge to travel again. However, 87 percent of them said that the expense of travel could influence where they go. Approximately 66 percent of tourists intend to take a journey lasting between one and six days. These figures are understandable given the lockdown situation that existed last year. This could also imply that consumers’ propensity to pay for things related to travel, dining, and socializing is less elastic than usual. As a result, an increase in the price of certain commodities may not always result in a decrease in their consumption. As a result, if demand remains high due to growing vaccination rates, inflation in various sectors of the economy may persist. This might lead to higher price pressures, pushing inflation above the Fed’s objective. If this leads to a faster-than-expected tightening in the US vs Japan, USD/JPY could continue on its upward track through 2021. Meanwhile, the Bank of Japan is remains concerned about low inflation. This means that dovish policies will likely last longer in the UK than in the US. (The contrast between a hypothetical inelastic demand curve and a typical, unitary demand curve is depicted in the chart below.) It’s only for show, and it’s supposed to show how inelastic demand reacts less strongly to changes in the price of a good.) Download our free 3Q trading advice from the DailyFX Free Trading Guides to read the full Japanese Yen forecast, including the technical outlook! Demand Curves: Hypothetical Inelastic vs. Unitary Elastic—- Daniel Dubrovsky is a strategist for DailyFX.com. Use the comments area below to reach out to Daniel, or follow him on Twitter at @ddubrovskyFX./n
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