USD/JPY Fundamental Weekly Forecast – Bullish if Investors Adjust Positions to Reflect Additional Rate Hikes

The price action in the Dollar/Yen was primarily driven by the up and down movement in Treasury yields. Rallies were also driven by flight to safety buying at the height of the political turmoil in Italy, and lower when tensions eased. Better-than-forecast U.S. jobs data also drove the Forex pair higher as it solidified a June rate hike by the Fed, and raised the odds of perhaps as many as two more rate hikes after that in 2018.

The USD/JPY settled at 109.519, up 0.134 or +0.12%.

There were no major reports out of Japan last week. However, several minor reports posted better than expected results including the SPPI, Retail Sales, Housing Starts and Capital Spending.

In other news, the BOJ’s Governor Kuroda acknowledged a slowdown in the Japanese economy. He also said the BOJ must begin to investigate the potential reasons behind Japan’s sluggish inflation and lagging wage growth.

U.S. job growth accelerated in May and the unemployment rate dropped to an 18-year low, highlighting tightening labor conditions. The government also reported solid wage gains, making a rate hike in June near-certain, and raising expectations of a fourth hike this year.

According to the Bureau of Labor Statistics, the U.S. economy continued to add jobs at a brisk pace in May, with nonfarm payrolls up 223,000 and the unemployment rate falling to 3.8 percent. Economists were looking for payroll growth of 188,000 and the jobless rate to hold steady at 3.9 percent.

Most importantly, the closely watched average hourly earnings metric rose 0.3 percent, slightly warmer than expected, yielding an annualized rate of 2.7 percent, up one-tenth of a point from April. Economists were looking for a 0.2 percent increase.

U.S. Treasury yields rose Friday after the government reported that the economy added more jobs than expected while wages increased better than expected in the month of May.

The yield on the benchmark 10-year Treasury note was higher at 2.888 percent, down from session highs above 2.9 percent. The yield on the 30-year Treasury bond was also higher at 3.035 percent.

Forecast

There are no major reports out of Japan this week. The U.S. is set to release data on ISM Non-Manufacturing PMI. With a June rate hike a statistical certainty, the focus for traders will focus on whether the Fed is concerned enough about inflation to raise interest rates in September and December, or only one more time.

Without any geopolitical events to muck up the markets, the direction of the USD/JPY will be primarily driven by the movement in Treasury yields. Geopolitical issues will create uncertainty and this will send investors into the Japanese Yen for safety reasons.

Volatility could return as Friday’s jobs report may have changed the outlook for additional rate hikes. This could force traders to adjust positions to reflect this.