USD/JPY Fundamental Analysis – Forecast for the Week of October 17, 2016

The USD/JPY closed the week at 104.166, up 1.260 or +1.22%, putting the Forex pair once again in a position to challenge the key technical area at 105.166 to 106.647. The catalyst behind the market’s strength was rising U.S. Treasury yields. They helped widen the spread between Treasury bonds and Japanese bonds, making the U.S. Dollar a more attractive investment.

Treasury yields rose to their highest levels in four months, supported by the previous week’s jobs data, hawkish minutes from the September Fed meeting and upbeat U.S. economic data at the end of the week. At the end of the week, traders had priced the probability of a rate hike in December at 70%, up from the previous week’s 66%.

There was one glitch in the uptrend on the daily chart. Surprisingly disappointing trade balance news from China raised concerns about the health of the country’s economy. This triggered a sharp sell-off in the global equity markets, sending investors into the safety of the Japanese Yen.

The weakness was short-lived, however, as the focus shifted back to the strength in the U.S. economy on Friday with the release of the latest retail sales and producer inflation figures. U.S. retail sales came in as expected at 0.6 percent last month after declining 0.2 percent in August. Other data suggested a pickup in inflation, with the PPI rising broadly last month to record their biggest year-on-year increase since December 2014.

The USD/JPY gave back some of its gains late Friday after Fed Chair Janet Yellen said the U.S. central bank might need to run a “high pressure” economy to reverse damage from the last financial crisis. Her view is not likely to alter expectations for a December rate hike, however, they did indicate the Fed is looking down the road and may mean few rate hikes because of her concerns about the last financial crisis.

FORECAST

This week’s price action should continue to be dominated by the rising U.S. Treasury yields and their support for the U.S. Dollar.

The direction of U.S. Treasury yields will be determined by several key U.S. economic reports. On October 18, the U.S. will release its latest inflation figures. The headline CPI is expected to rise 0.3%, up from the previous 0.2%. Core CPI is expected to come in at 0.2%, slightly below the previous 0.3%. Higher figures will be bullish for the USD/JPY because they will increase the chances of a Fed rate hike in December.

On October 19, traders will get the chance to react to the latest data on Building Permits. They are expected to show a slight rise from 1.14M to 1.17M.

On Thursday, the Philly Fed Manufacturing Index will be released. It is expected to come in at 5.2, below the previous 12.8. Weekly Unemployment Claims should come in at 251K.

There are no major reports from Japan next week.

Look for the USD/JPY to continue to rise if the economic data continues to push U.S. Treasury yields higher. It could see some selling pressure on profit-taking on a test of 105.166 to 106.647. This zone offers the best resistance next week.