USD/JPY Fundamental Daily Forecast – Safe-Haven Demand for Yen Caps Gains, Higher Treasury Yields Underpin

The Dollar/Yen finished lower for a third straight session on Friday, suggesting the hawkish Fed minutes from Wednesday and the jump in the odds of a March rate hike may have already been priced in by speculative investors.

The carry trade could have also played a role in the weakness. With U.S. equity markets falling sharply since Wednesday, many investors sought protection in the safe-haven Japanese Yen. They also had to pay back low interest loans from Japanese banks. In order to do this, they had to sell dollars and buy yen.

On Friday, the USD/JPY settled at 115.562, down 0.294 or -0.25%. The Invesco CurrencyShares Japanese Yen Trust ETF (FXY) closed at $81.22 or +0.31%.

Also weighing on the Forex pair was a U.S. Labor market report that showed nonfarm payrolls for December fell well short of estimates. But softening the blow from the headline miss was a surge in U.S. Treasury yields to 1.8%.

Remember the long-term trend in the Dollar/Yen is controlled by the spread between U.S. Government bond yields and Japanese Government bond yields, so let’s just call the NFP report short-term noise.

US Labor Market Report Recap

December’s nonfarm payrolls grew by 199,000, while economists were expecting the economy to have added 422,000 jobs in December, according to estimates compiled by Dow Jones.

While the overall jobs numbers were disappointing, the unemployment rate dropped to 3.9%, according to Bureau of Labor Statistics data. The unemployment rate was forecast to come in at 4.1%.

Plus, average hourly earnings increased by 0.6%, above expectations.

Treasury Yields Rise

U.S. Treasury yields rose as high as 1.8% on Friday following the release of December’s non-farm payrolls report.

The yield on the benchmark 10-year Treasury note finished at 1.766%. The yield on the 30-year Treasury bond rose to 2.1172%.

Yields have been rising since Wednesday, as investors digested the Federal Reserve’s latest meeting minutes, in which officials indicated that the central bank was ready to more aggressively pullback its policy support of the economy.

Short-Term Outlook

We could be looking at a mixed short-term performance with the USD/JPY supported by a widening interest rate differential between U. S. Government bonds and Japanese Government bonds. But we could also see flight to safety buying of the Japanese Yen if the U.S. stock market continues to fall.