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USD/JPY Fundamental Weekly Forecast – Could Rally if Rising Treasury Yields Offset Tariff News

By:
James Hyerczyk
Updated: Sep 16, 2018, 10:39 UTC

There are no major U.S. economic reports this week but Treasury yields could continue to move anyway as investors position themselves ahead of the next Fed interest rate announcement on September 26.

Japanese Yen

The Dollar/Yen finished sharply higher last week. Traders, for the most part, ignored reports of lower domestic inflation data and trade dispute concerns and primarily focused on the widening interest rate differential between U.S. Government bond yields and Japanese Government bond yields.

For the week, the USD/JPY settled at 112.072, up 0.989 or +0.89%.

Technical factors also played a role in the Forex pair’s strength. The USD/JPY is now trading on the strong side of a major retracement zone on the weekly chart at 110.662 to 110.061. This zone is new support.

The buying was also strong enough to take out a pair of tops on the daily chart at 111.770 and 111.830, putting the Forex pair in a position to challenge the August 1 main top at 112.152. This price is the potential trigger point for an acceleration into the mid-July top at 113.210.

Last Week’s News

There were no major news events in Japan last week. Minor events included better-than-expected data on Bank Lending, Economy Watchers Sentiment and Core Machinery Orders.

In the U.S., the USD/JPY was held in check for a few days by lower-than-expected U.S. Producer and Consumer Inflation reports. This news did raise concerns for bullish traders that the Fed was nearing neutrality and that the pace of rate hikes could slow after December.

Causing a two sided response was a report that the U.S. had extended an invitation to China to resume trade talks. This news was bearish for both the dollar and the yen because it potentially limits safe-having buying. However, since it did lead to increased demand for risky assets, the bias was towards the U.S. Dollar.

After brushing off these seemingly non-events, traders went back to focusing on U.S. Treasury yields on Friday. This is what appears to have put the Dollar/Yen over the top at the end of the week.

The dollar rose against the Japanese Yen on Friday as upbeat U.S. economic data and higher Treasury yields rekindled some investor appetite for the greenback.

The U.S. Commerce Department said domestic retail sales rose 0.1 percent in August, the smallest gain in six months, but July figures were revised higher, supporting the view of solid consumer spending in the third quarter. Consumer optimism also improved to its strongest since March, according to the University of Michigan. Additionally, industrial output rose 0.4 percent.

Friday’s news offset the weak inflation data, sending U.S. Treasury yields sharply higher and increasing demand for the U.S. Dollar.

Forecast

The Dollar/Yen could begin the week on shaking ground if reports from over the week-end are accurate. The Wall Street Journal reported Saturday, citing individuals familiar with the matter that President Trump is planning to impose a fresh round of tariffs targeting about $200 billion in Chinese goods. If this news negatively affects demand for risky assets then money could flow back into the safe-haven Japanese Yen.

According to the Journal, the tariffs are expected to be set at around 10%, according to people familiar with the matter, a lower level than the possibility of 25% tariffs previously floated by the administration.

With the move, Trump is trying to pressure Beijing ahead of planned high-level discussions and is intended to provide the U.S. leverage in talks over China’s alleged practice of demanding American companies turn over technology in order to do business in the country, the Journal reported.

There are no major U.S. economic reports this week but Treasury yields could continue to move anyway as investors position themselves ahead of the next Fed interest rate announcement on September 26.

Last week, the benchmark 10-year Treasury note rose to over 3 percent. This widened the spread between U.S. Government bond yields and Japanese Government bond yields, making the U.S. Dollar a more attractive investment.

Minor reports include the Empire State Manufacturing Index, Building Permits, Housing Starts and the Philadelphia Fed Manufacturing Index.

The Bank of Japan is scheduled to release release its Monetary Policy Statement and hold a press conference on Wednesday. Look for the BOJ to keep its short-term interest rate target at minus 0.1% and the 10-year government bond yield at around zero percent.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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