USD/JPY Fundamental Daily Forecast – Widening Interest Rate Differential Driving U.S. Dollar Higher

The Dollar/Yen is up on Friday after the release of mixed labor market data sent U.S. Treasury yields higher. The jump in interest rates helped widen the spread between U.S. Government bond yields and Japanese Government yields. This helped make the U.S. Dollar a more attractive investment. Essentially, the divergence between the monetary policies of the hawkish U.S. Federal Reserve and the dovish Bank of Japan is driving the price action.

At 1257 GMT, USD/JPY is trading 113.394, up 0.0136 or +0.01%.

The benchmark 10-year yield hit their highest level since 2011 on Friday after the Labor Department’s monthly jobs report showed another month of rising wages and a sharply higher revision to August’s headline number.

The U.S. economy added only 134,000 jobs in September, well below the expected gain of 185,000. However, investors were primarily impressed by the job gains for August which received a sharp upward revision with the addition of 270,000 jobs from 201,000.

Additionally, job creation for September fell to its lowest level in a year, but the unemployment rate dropped to a level not seen in nearly 50 years, the government report showed. The unemployment rate fell to 3.7 percent, down from 3.9 percent.

Average Hourly Earnings rose 8 cents or 0.3 percent over the month, matching August’s gains. That drove the year-over-year increase in wages to 2.8 percent.

Forecast

We could see a two-sided trade today. The USD/JPY initially rose in response to the rise in U.S. Treasury yields. However, this move also fueled a drop in U.S. equity prices. If a sell-off in the stock market gains some traction then the Japanese Yen may begin to find support due to flight-to-safety buying.

Overall, the Dollar/Yen should be supported by firm Treasury yields. If they begin to fall off their highs and stocks get hit hard then prepare for a reversal to the downside by the USD/JPY.