USD/JPY Fundamental Daily Forecast – Bullish Traders Need Higher PPI to Justify Recent Price Surge

The Dollar/Yen continues to trade sideways for a third session on Wednesday as U.S. Treasury yields dipped from yesterday’s multi-year highs, and on dampened appetite for risk. Domestic data is influencing the price action. Additionally, investors are keeping an eye on today’s U.S. economic reports as well as Thursday’s U.S. Treasury’s currency report.

At 0356 GMT, the USD/JPY is trading 113.025, up 0.066 or +0.06%.

On Tuesday, U.S. government debt investors continued to ride the wave fueled by last week’s hawkish comments from U.S. Federal Reserve Chairman Jerome Powell.

Traders returned from Monday’s Columbus Day holiday by driving the yield on the benchmark 10-year Treasury note above 3.25 percent in early trading, returning to its highest level since 2011. The yield on the 30-year Treasury bond rose above 3.43 percent, its highest level since 2014. The 10-year finished the session at 3.21 percent and the 30-year at 3.375.

U.S. equity indexes finished mostly lower on Tuesday after posting a volatile two-sided session. Investors were mostly worried about rapidly rising interest rates ahead of the start of third quarter earnings season. Investor uncertainty helped the major indexes swing between positive and negative territory several times throughout the session.

In economic news, it was another light day on Tuesday with the NFIB Small Business Index coming in at 107.9, below the 108.9 forecast. The IBD/TIPP Economic Optimism reading was 57.8, well above the 54.6 estimate.

Forecast

Earlier today, Japan’s Core Machinery Orders report showed a 6.8% increase. This was much better than the -3.9% estimate, but off last month’s 11.0% pace. The increase is a sign that capital spending is set to grow as companies invest in new equipment and software to manage labor shortages. However, the trade war between the United States and China poses a risk to the outlook because it could indirectly reduce sales from China, making some Japanese manufacturers less likely to buy new equipment.

Later today at 0600 GMT, Japan will release a report on Preliminary Machine Tool Orders. The previous read was 5.1%.

Today’s U.S. Producer Price Index (PPI) report is expected to move the USD/JPY. It is expected to show a monthly increase of 0.2%, up from the previously reported -0.1%. Core PPI is also expected to show a rise of 0.2%, also up from -0.1%.

Final Wholesale Inventories are estimated to have risen 0.8%. The Treasury also holds a 10-year auction today. Additionally, the Treasury could release its Currency Report, in which it is expected to name currency manipulators.

Traders will be watching the PPI data because it needs to justify the surge in Treasury yields. Lower than expected PPI could drive yields lower as well as the Dollar/Yen.