USD/JPY Fundamental Daily Forecast – Strong CPI, Rising Treasury Yields Will Have Bullish Impact

The Dollar/Yen is trading higher early Thursday as investors await the release of the U.S. Consumer Inflation report for April at 1230 GMT. The report is important because it is one piece of data the Fed will use to determine the strength of the economy and the number of interest rate hikes later in the year.

At 0641 GMT, the USD/JPY is trading 109.816, up 0.083 or +0.08%.

Earlier today, the Bank of Japan released its Summary of Opinions. The report showed the BOJ is working to prepare markets for a future withdrawal of its huge stimulus program, with some policymakers calling for more scrutiny of the rising cost of prolonged easing.

One of the nine BOJ board members said the central bank must find ways to gain public understanding that it is ready to dial back monetary support if the economy continues to improve.

“It’s necessary to give a clear definition on what we mean by an ‘exit’ from easy policy and ‘policy normalization’,” the policymaker was quoted as saying.

If you recall, at the April meeting, the BOJ kept policy steady, but ditched a timeframe it had set for hitting its 2 percent inflation target, a surprise move analysts say is aimed at keeping market expectations for more stimulus in check.

The survey also showed that some members reiterated the need to maintain ultra-easy policy and even strengthen the BOJ’s commitment to hit its 2 percent inflation target with price growth still distant from that level.

Others, however, said the central bank must focus more on the rising demerits of its policy, such as the damage that years of near zero rates is inflicting on financial institutions’ profits.

“Looking at recent developments in corporate bond markets and bank lending, the effect of monetary easing…on economic activity and prices could be becoming smaller,” one of the members was quoted as saying.

“It’s important to further scrutinize the appropriate shape of the yield curve, as the cumulative impact on banks’ financial strength becomes increasingly severe,” the member said, advocating raising the BOJ’s bond yield target in the future.

Another member said the BOJ should continue to take a careful at both merits and demerits of the bank’s purchases of risky assets such as exchange-traded funds (ETF).

In other news, U.S. interest rates continued to rise on Wednesday with the 10-year Treasury note breaking above the 3 percent mark for the second time in less than a month. This move may have kept investors on edge while limiting gains in the energy-driven indexes. The two-year note yield also traded at its highest level in nearly a decade.

In economic news, the U.S. Labor Department said producer prices edged up just 0.1 percent in April – the smallest increase since December – capped by a slump in food costs. The department said that the read on the producer price index, which measures inflation pressures before they reach consumers, followed a 0.3 percent rise in March.

Core prices, which exclude volatile energy and food, matched expectations of a 0.2 percent increase in April. Over the past 12 months, wholesale prices are up 2.6 percent while core wholesale prices have risen 2.3 percent, according to Reuters.

Forecast

The BOJ Summary Opinions had little impact on the USD/JPY because the central bank is still far from exiting its stimulus strategy. Additionally, the focus is on U.S. central bank policy at this time.

Basically, the divergence between the hawkish Federal Reserve and the dovish Bank of Japan is widening the spread between U.S. Government Bond yields and Japanese Government Bond yields. This favorable interest rate differential is making the U.S. Dollar a more attractive asset then the Japanese Yen.

This trend is likely to continue on Thursday if the U.S. Consumer Price Index continues to show inflation is climbing. Ahead of the CPI and Core CPI reports, investors are pricing in a read of 0.3% and 0.2% respectively.

Investors will also get the opportunity to react to Weekly Unemployment Claims, which are expected to come in at 219K, a 30-year Bond Auction and the Federal Budget Balance.

Look for the bullish trend in the USD/JPY to continue as long as Treasury yields continue to rise.