USD/JPY Fundamental Daily Forecast – Dollar Rises on Recovery Bets; Yen Returns to Funding Currency Status

The Dollar/Yen is inching lower early Friday after touching its highest level since April 6 earlier in the session on the back of strong U.S. economic data from Thursday that raised the chances of the Fed discussing tapering at its mid-June meeting.

The Forex pair came close to a clean breakout over last week’s top at 110.220 with the March 31 top at 110.966 the next target, but buyers backed-off ahead of today’s U.S. Non-Farm Payrolls report, due to be released at 12:30 GMT.

At 05:36 GMT, the USD/JPY settled at 110.237, down 0.070 or -0.06%.

ADP Reports Biggest Private Payrolls Gain in Seven Months

U.S. private payrolls surged by the most in seven months in April as companies rushed to boost production amid a surge in demand, suggesting the economy gained further momentum early in the second quarter, powered by massive government aid and rising COVID-19 vaccinations.

Strengthening labor market conditions were reinforced by other data on Wednesday showing a measure of services industry employment increased last month by the most in more than 2-1/2 years. The reports bolstered expectations for another month of blockbuster employment growth in April.

Private payrolls by 742,000 jobs last month, the largest gain since last September, the ADP National Employment Report showed. Companies hired 565,000 workers in March. Economists polled by Reuters had forecast private payrolls would increase by 800,000 jobs in April.

Weekly Initial Claims Fall Below 400,000

The number of Americans filing new claims for unemployment benefits dropped below 400,000 last week for the first time since the COVID-19 pandemic started more than a year ago, pointing to strengthening labor market conditions.

Initial claims for state unemployment benefits fell 20,000 to a seasonally adjusted 385,000 for the week ended May 29. That was the lowest since mid-March 2020, when mandatory closures of nonessential businesses were enforced to slow the first wave of coronavirus infections. Economists polled by Reuters had forecast 390,000 applications for the latest week.

Bullish Outlook for Dollar/Yen

Traders are now awaiting the release of the U.S. Non-Farm Payrolls report at 12:30 GMT. The results of this report could set the tone at central bank meetings later this month. Wall Street economists’ consensus forecast was for 650,000 new U.S. jobs last month. The Unemployment Rate is expected to drop from 6.1% to 5.9% and Average Hourly Earnings are forecast to increase 0.2%.

The Japanese Yen is one of the world’s worst performers this year, and that weakness could linger a while. As investors bet on economic recoveries in the United States and Europe, boosting global equities and bond yields as well as the dollar, the Yen’s status as a cheap and safe funding currency has been reinforced. In other words, watch out for the reemergence of the carry-trade.

The Fed is starting to face inflation risks and contemplating a withdrawal of emergency pandemic stimulus, while the Bank of Japan is still grappling with the threat of deflation. This should make the U.S. Dollar a more attractive asset over the mid- to long-term.