USD/JPY Fundamental Weekly Forecast – Appetite for Risk, Rising Treasury Yields Underpinning Dollar/Yen

The Dollar/Yen fell last week in reaction to increased appetite for risk, hawkish Fed minutes, upbeat U.S. economic data, and rising U.S. Treasury yields.

The USD/JPY settled last week at 113.039, up 0.393 or +0.35%.

The major U.S. stock indexes started 2018 on a positive note, with all three equity indexes reaching record highs. This drove down demand for the lower-yielding Japanese Yen. The highlights of the week were the Dow overtaking the psychological 25,000 level for the first time. The S&P 500 Index posted its best weekly performance in over a year. Global equity markets also continued their 2017 run with strong rallies last week.

The Fed minutes revealed the usual divided central bank members, but they also tipped the scales toward the more hawkish FOMC members.

The Fed raised rates a quarter-point at its December meeting, with most FOMC officials backing the continued path of gradual rate hikes. According to the minutes, some Fed members were concerned about low inflation. Others thought the tight labor market and tax hikes could help boost inflation.

ISM Manufacturing PMI beat the 58.1 forecast with a read of 59.7. On January 4, the AD{ Non-Farm Employment Change report showed the private sector of the economy added 250K new jobs in December. Weekly Unemployment Claims, however, came in higher than expectations at 250K.

The U.S. Labor Department reported that the U.S. economy added a disappointing 148,000 jobs in December while the unemployment rate held at 4.1 percent. Economists were looking for non-farm payrolls to grow by 190,000. The total was well below the November pace of 252,000, which was revised up from the initially reported 228,000.

The bright spot in the U.S. December employment report was the rise in wage growth. Average hourly earnings rose 9 cents, or 0.3 percent, in December after gaining 0.1 percent in the prior month. This news lifted the annual increase in wages to 2.5 percent from 2.4 percent in November.

Finally, Non-Manufacturing PMI came in below expectations at 55.9.

Rising U.S. Treasury yields helped widen the spread between U.S. Government Bonds and Japanese Government Bonds, making the U.S. Dollar a more attractive investment.

Forecast

Increasing appetite for risky assets and rising Treasury yields are expected to continue to support the USD/JPY. Stocks may be getting close to overbought due to value issues. Additionally, volatility may increase if investors decide to take profits and play for a correction into a value area. If this move occurs, we could see a break in the Forex pair.

There are no major reports out of Japan this week. Instead, traders will focus on Fed member speeches and U.S. inflation data.

On Thursday, the U.S. will release data on producer inflation. On Friday, investors will get the opportunity to react to reports on consumer inflation and retail sales.

Increasing inflation will drive up the odds of a Fed rate hike in March. This will be bullish for the USD/JPY. Stagnant inflation could drive the U.S. Dollar lower.