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James Hyerczyk
USD/JPY

The Dollar/Yen rallied to its highest level since December 14 last week as rising U.S. Treasury yields widened the spread between U.S. Treasury bonds and Japanese Government bonds, making the U.S. Dollar a more attractive investment.

U.S. Government bond prices dropped as investors bet Democratic control of the U.S. Congress would enable President-elect Joe Biden to borrow and spend heavily, while higher yields helped a bruised U.S.
Dollar recovery from near three-year lows.

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Last week, the USD/JPY settled at 103.966, up 0.726 or +0.70%.

U.S. Treasury prices extended their steepest sell-off in months with the benchmark yield at its highest in 10 months. Victories in two Georgia races handed the Democratic Party narrow control of the U.S. Senate, bolstering Biden’s power to pass his agenda with his party controlling both chambers.

After Congress formally certified Biden’s election victory in the early hours of Thursday, Wall Street focused on the implications of the Democrats’ control of Congress. Major indexes hit record highs on bets that more pandemic stimulus will help the economy ride out the downturn.

Japanese Economic News

Last week, the Japanese government reported Consumer Confidence came in lower than expected at 31.8. Analysts were looking for a reading of 32.6. This number was likely tied to rising coronavirus cases and the possibility or tighter restrictions and lockdowns.

Household spending rose a real 1.1% in November from a year earlier, with a rebound from the previous year’s drop due to a tax hike outweighing a decrease amid a resurgence of coronavirus infections. Seasonally adjusted spending in November fell 1.8% from the previous month for the first decline in four months. The month saw the start of a third wave of virus infections with daily numbers of cases continuing to rewrite record levels.

“Consumption of some items increased in reaction to (falls in the previous year triggered by the tax hike), but at the same time, declines in spending on components such as eating out widened as virus infections spread,” a ministry official told reporters.

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Weekly Forecast

At times last week, the market felt “normal” for the first time in over nine months with “normal” defined as conditions that I had grown accustomed to trading for years. A widening spread between U.S. yields and Japanese yields, a stronger U.S. Dollar, the carry trade and increased demand for risk. It reminded me of a time when trading was much easier.

These conditions are likely to continue as long as U.S. Treasury yields continue to rise. We could see this strength continue into at least the January 14 speech by Fed Chair Jerome Powell. And if he says the right thing, the yields and the USD/JPY could surge into the U.S. Federal Reserve’s monetary policy announcement on January 27.

For a look at all of today’s economic events, check out our economic calendar.

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