USD/JPY Fundamental Daily Forecast – Dollar/Yen Soars to Three-Year High as Interest Rate Differential Widens

The Dollar/Yen soared to its highest level in nearly three years on Monday as investors remained confident the U.S. Federal Reserve will announce a tapering of its massive bond-buying next month despite softer U.S. payrolls figures.

On Monday, the USD/JPY settled at 113.326, up 1.094 or +0.97%.

Traders shrugged off Friday’s mostly lackluster jobs report, pushing U.S. bond yields higher. The yen, which is known for being particularly sensitive to interest rate differentials, hit 113 yen per dollar for the first time since December 2018 in Tuesday’s early trade.

The Japanese currency was also hurt by a slight tilt towards riskier currencies, with the Australian Dollar gaining on the greenback, as oil prices hit multi-year highs on the back of the energy crisis gripping major economies amid a pick-up in economic activity.

With Japanese government bond rates well anchored and the Bank of Japan keeping policy on ice, expectations of a Fed tapering announcement soon should drive U.S. Treasury yields higher. This will widen the spread between U.S. Government bonds and Japanese Government bonds, making the U.S. Dollar a more attractive asset.

Monday Recap

U.S. fixed income markets were closed on Monday for a holiday but the yield on the benchmark 10-year Treasuries hit a four-month high of 1.617% on Friday, even after data showed the U.S. economy created the fewest jobs in nine months in September, missing forecasts.

However, data for August was revised up sharply and the jobless rate dropped to an 18-month low, suggesting fears of a labor shortage remain justified, keeping inflation worries alive and giving the Fed justification to reduce its emergency stimulus begun last year.

Domestic News

In Japan, Preliminary Machine Tool Orders fell to 71.9%, down from a revised 85.2%. Bank Lending came in below expectations at 0.6%. Japan producer inflation surprised by jumping 6.3%. This beat the 5.8% forecast. The previous month was also revised higher to 5.8%.

Daily Forecast

Economic data is on the light side in the United States on Tuesday with many traders likely focused on Wednesday’s U.S. consumer inflation report.

Tuesday’s JOLTS report will be watched for confirmation that U.S. labor problems reflect a lack of supply rather than of demand.

Last month, the number of job openings during the reported came in at 10.93 million. This month traders are looking for a reading of 10.95 million.

FOMC Members Clarida and Bostic are also scheduled to speak. The USD/JPY could rise further if both Fed officials support the start of tapering as early as November.