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James Hyerczyk
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USD/JPY
USD/JPY

With no major reports from Japan this week, the movement in the Dollar/Yen has been largely influenced by two factors: a potential escalation of the global trade disputes and rising U.S. Treasury yields. Increased demand for risky assets also helped boost demand for the dollar.

Although the headlines have been warning that the global trade disputes will eventually lead to a slowdown in the global economy, we haven’t seen any evidence of this so far especially with the U.S. economy humming along nicely. If there were major concerns, investors would be seeking shelter in the safe-haven Japanese Yen, and the price action this week shows none of this. In fact it shows money is moving into the U.S. Dollar.

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At 0700 GMT, the USD/JPY is trading 111.533, down 0.071 or -0.06%.

Stronger-than-expected U.S. economic data and another jump in U.S. Treasury yields helped trigger a surge in the USD/JPY on Tuesday. This trend could continue today with the release of the U.S. Producer Price Index report. A rebound rally in technology shares also contributed to Tuesday’s rally. We could see a follow-through rally today on the back of potentially strong gains in shares of Apple stock.

In economic news, the National Federation of Independent Business (NFIB) reported that small business optimism jumped to a record high last month, boosted by lower taxes and looser regulations. The report showed its index climbing to 108.8, up from 107.9. Economists had forecast a move to 108.1.

Final Wholesale Inventories posted a 0.6% gain. This was a positive because it came in lower than the 0.7% estimate and previous month.

The JOLTS Job Openings report jumped to 6.94 Million. The previous month was revised upward to 6.82 Million. Investors were looking for a reading of 6.68 Million. U.S. job openings surged to a record high in July and more Americans voluntarily quit their jobs, pointing to sustained labor market strength and confidence that could soon spur faster wage growth.

Investors are also reacting to the widening of the spread between U.S. Government bonds and Japanese Government bonds. This is helping to make the U.S. Dollar a more attractive investment.

The highlight of Tuesday’s session was another jump in the yield on the benchmark U.S. two-year note, which hit its highest level since 2008 amid signs of a stronger economy and a slew of inflation data later this week.

The two-year yield hit 2.744 percent for the first time since July 2008. The yield on the benchmark 10-year Treasury note was higher at 2.974 percent, while the yield on the 30-year Treasury bond was up at 3.117 percent.

In other news, the U.S. Treasury Department auctioned $35 billion in three-year notes at a high yield of 2.821 percent. Other details showed the bid-to-cover ratio at 2.68. This is an indicator of demand. Indirect bidders, which include major central banks, were awarded 46.3 percent. Direct bidders, or domestic money managers, bought 10.7 percent.

Forecast

The Dollar/Yen should continue to pick up strength on Wednesday as long as there is demand for risky assets and U.S. Treasury yields continue to rise. However, the buying could get a little dicey as the Forex pair approaches a pair of tops at 111.770 and 111.830. These two tops are the gateway to the next major top at 112.152.

Rising stocks should continue to keep upward pressure on the USD/JPY. They could be boosted by another strong performance in Apple, which is expected to make a major announcement at a company marketing event.

Any announcement of new tariffs by the U.S. on China could cause some intra-day volatility, but this story has been out there for about a week so I think the news has been fully-priced into the market.

Investors are also watching another trade-related event. On Tuesday, China said it would approach the WTO next week to request permission to impose sanctions on the U.S. The meeting is scheduled to take place on September 21. The question is, are investors pricing this outcome into the market, or are they prepared to wait until September 21.

Today’s U.S. economic events could generate some volatility. At 1230 GMT, the Producer Price Index report is expected to show an increase of 0.2%. Core PPI is expected to have risen 0.2%. FOMC Member Brainard is scheduled to speak at 1645 GMT and the Fed will release its Beige Book at 1800 GMT.

The early price action on Wednesday suggests the direction of the USD/JPY today will be determined by trader reaction to 111.770 and 111.830. If buyers can’t make a run at these two tops then look for a possible pullback into 111.242.

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