USD/JPY Fundamental Daily Forecast – Higher Treasury Yields Forcing Shorts to Make Adjustments

The Dollar/Yen is trading sharply higher on Monday. The buying is being driven by rising U.S. Treasury yields. Higher yields are widening the spread between U.S. Government bonds and Japanese Government bonds, making the U.S. Dollar a more attractive investment.

The catalyst behind today’s price action is Friday’s robust U.S. Non-Farm Payrolls report and the stronger-than-expected ISM Manufacturing PMI report.

At 1136 GMT, the USD/JPY is trading 109.870, up 0.365 or +0.34%.

U.S. Economic Data

On Friday, data showed that the U.S. economy created 304,000 jobs in January, the highest in 11 months, and above street estimates, although December’s strong figure was revised lower to 222,000. The median estimate in a Bloomberg survey called for an increase of 165,000.

The Unemployment Rate increased to 4% from 3.9%. This slight rise was a reflection of the partial government shutdown, as the number of unemployed on temporary layoff rose by 175,000, many of them federal workers, according to the Labor Department.

Average hourly earnings showed a muted gain. They rose just 0.1% from the prior month, missing forecasts. The annual gain of 3.2% matched estimates though down from an upwardly revised 3.3% in December.

“The January PMI registered 56.6 percent, an increase of 2.3 percentage points from the December reading of 54.3 percent,” the ISM said in its latest Manufacturing Report on Business.

Essentially, the report showed U.S. production rebounded in January after a weak December, led by a sizable rise in new orders.

“The January PMI registered 56.6 percent, an increase of 2.3 percentage points from the December reading of 54.3 percent,” the ISM said in its latest Manufacturing Report on Business.

Essentially, the report showed U.S. production rebounded in January after a weak December, led by a sizable rise in new orders.

Daily Forecast

Today’s price action suggests that some buyers believe there may be grounds for at least one rate hike in 2019 despite forecasts of a recession. Therefore, they are being forced to readjust their positions to reflect this assessment.

One reason for the buying is that traders are shrugging their shoulders to concerns of a slowdown in the U.S. economy. This is leading investors to trim expectations the Fed would need to cut interest rates to support the economy later this year.

Higher Treasury yields are also making the U.S. Dollar a more attractive investment with the benchmark 10-year U.S. Treasury yield rising to 2.69 percent from a four-week low at 2.619, hit earlier last week.

Low volume may also be behind the strength of the rally with China’s financial markets closed all week for the Lunar New Year holiday. Other Asian markets are also closed at different times of the week.