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James Hyerczyk
USD/JPY

The Dollar/Yen is trending higher for a third session this week as virus fears and worries about U.S. stimulus continue to underpin the greenback. The Japanese currency has been among the best performing majors this month as jitters in the global equity markets drove safe-haven demand, however, this week is a little different as investors have opted to move into the safe-haven U.S. Dollar for protection.

At 04:16 GMT, the USD/JPY is trading 105.072, up 0.118 or +0.11%.

Some traders aren’t sure why the Dollar/Yen is stronger this week, but when in doubt, they fall back to oversold technical conditions. Others are saying the rebound in the Forex pair is normal.

“It’s not uncommon with sudden Yen move that it’s driven by domestic asset managers coming in to buy foreign assets at the lows, and buying dollars to pay for them,” said Stuart Oakley, a London-based executive at Nomura.

Still others are staying that Japanese investors took advantage of the Japanese bank holiday and the thin volume that goes along with it to buy cheap dollars.

Dollar Boosted by Hawkish Fed Comments; Higher Demand for Risky Assets

The U.S. Dollar is also being supported by hawkish remarks from a Federal Reserve speaker after Chicago Federal Reserve President Charles Evans mentioned the prospect of raising interest rates. This came as a surprise to investors because the narrative from central bank policymakers since March has been we’re not going to raise rates at any point in the foreseeable future.

“I would like to raise rates as soon as anybody,” Evans said. For me, that’s going to be when the economy is very very strong and real rates are rising,” he said. “Monetary policy in some sense would follow the economy up,” he said.

“We could start raising rates before we start averaging 2%, we need to discuss that,” he added.

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Japan Economic News

Japan’s factory activity extended declines in September largely due to a sharper fall in output, as the world’s third-largest economy struggles to stage a robust recovery from the coronavirus pandemic.

The au Jibun Bank Flash Manufacturing Purchasing Managers’ Index (PMI) was largely unchanged at 47.3 in September compared with a final 47.2 in the previous month.

Output contracted at a faster pace for the first time in four months, weighing on the headline index, which remained below the 50.0 threshold that separates contraction from expansion for a 17th month.

“New order inflows continued to fall in September, reflecting subdued demand,” said Bernard Aw, principal economist at IHS Markit, which compiles the survey.

“That said, the picture of the economy remained much improved when compared to the height of the pandemic during the second quarter.”

Daily Forecast

The USD/JPY popped to a one week high on Wednesday, as traders continued to react to the hawkish tone of the comments from Chicago Federal Reserve President Charles Evans. He mentioned pausing QE and rates rising before the inflation target is reached. That was enough to spook U.S. Dollar bears. Furthermore, for longer-term traders, it signals a stronger U.S. Dollar once we put the COVID-19 pandemic behind us.

We could have a volatile session on Wednesday if Evans decides to walk back his comments. Traders will also get the opportunity to react to comments from Fed speakers including Loretta Mester and Randal Quarles. Fed Chair Powell also testifies before Congress for a third session.

The major reports are the Flash Manufacturing PMI and the Flash Services PMI.

The Flash Manufacturing PMI report is expected to come in at 52.5, down slightly from the previously reported 53.1. Flash Services PMI is forecast at 54.5, down slightly from the previously reported 55.0.

For a look at all of today’s economic events, check out our economic calendar.
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