USD/JPY Fundamental Daily Forecast – Japan Reports Trade Surplus, But Investors Focusing on US Inflation Data

The Dollar/Yen is trading flat-to-slightly lower early Tuesday as traders mirrored the overnight movement in Treasury yields. Trading was relatively light following a two-day surge that drove the Forex pair to its highest level since July 23 as investors awaited the release of a key U.S. consumer inflation report on Wednesday. In other news, a stronger-than-expected Japanese Current Account report failed to generate any reaction from traders.

At 05:15 GMT, the USD/JPY is trading 110.330, down 0.013 or -0.01%.

Strong Labor Market Data, Hawkish Fed Speakers Underpinning US Dollar

Since Friday’s labor market report the prospect of the Fed’s reduced bond-buying has pushed down U.S. bond prices, lifting their yields and strengthening demand for the U.S. Dollar.

On Monday, the USD/JPY was underpinned as U.S. Treasury yields spiked to three-week highs as surprising strong job openings on top of better-than-expected employment gains in July added to the narrative of an improving labor market.

U.S. job openings, a measure of labor demand, shot up by 590,000 to a record-high 10.1 million on the last day of June, the U.S. Labor Department reported in its monthly Job Openings and Labor Turnover Survey (JOLTS).

That followed Friday’s Non-Farm Payrolls report showing jobs increased by 943,000 in July, above the 870,000 forecast by economists in a Reuters poll.

Fed Speakers Discuss Timing of Tapering

Atlanta Federal Reserve Bank President Raphael Bostic, the first Fed speaker after the jobs data was released, said on Monday he is eyeing the fourth quarter for the start of a bond-purchase taper but is open to an even earlier move if the job market keeps up its recent torrid pace of improvement, Reuters reported.

Boston Federal Reserve Bank President Eric Rosengren was equally forthright, saying that the U.S. central bank should announce in September that it will start reducing its $120 billion in monthly purchases of Treasury and mortgage bonds in the fall, according to Reuters.

Japan Logs 905.1 Billion Yen Current Account Surplus in June

Japan logged a current account surplus of 905.1 billion Yen ($8.2 billion) in June, staying in the black for 84 months, the Finance Ministry said Tuesday. Among key components, the country had a goods trade surplus of 648.5 billion Yen and a services trade deficit of 346.4 billion Yen, according to the ministry’s preliminary report. Primary income, which reflects returns on overseas investments, posted a surplus of 680.5 billion Yen.

Daily Forecast

The early price action suggests investors are preparing for Wednesday’s U.S. consumer inflation (CPI) report and the subsequent reaction by U.S. Treasury yields.

Traders seem to be downplaying this inflation report, compared to the previous three reports as the pace of the rise in consumer prices is expected to slow just like the Fed said it would when it called the recent surge “transitory”. Furthermore, the focus for investors has shifted toward the labor market.

The U.S. consumer price index (CPI) and the producer price index (PPI) released Wednesday and Thursday, respectively will provide an insight into the current pace of inflation, one of the key factors along with the labor market that the Fed looks at when making its monetary policy decisions.

CPI is expected to moderate slightly after last month’s jump of 0.9%, the strongest gain since June 2008. The Fed has said the current surge in inflation is just temporary, but market sentiment has been hit by fears of higher inflation resulting in sudden tapering.