USD/JPY Fundamental Weekly Forecast – GDP Data Important , but Treasury Yields Still Controlling Price Action

A jump in U.S. Treasury yields helped boost the Dollar/Yen because it widened the spread between U.S. Government Bonds and Japanese Government Bonds, making the U.S. Dollar a more attractive investment.

Last week, the USD/JPY settled at 106.571, up 0.636 or +0.60%.

Benchmark U.S. Treasury yields surged to seven-week highs last week after the Treasury sold a record amount of 30-year bonds to weak demand. In this sale, the Treasury moved $26 billion in bonds, up from $22 billion at its last quarterly refunding in May.

The debt sold at a high yield of 1.406%, around three basis points higher than were the debt traded before the sale. Primary dealers took a larger than average share of 28% of the bonds, indicating tepid demand from investors. The bid-to-cover ratio of 2.14 times was the lowest since July 2019.

The Treasury last week increased auction sizes across the curve and said that it plans to continue to shift more of its funding to longer-dated debt in coming quarters as it finances measures to offset the impact of the coronavirus epidemic.

After rallying four out of five sessions last week, the Dollar/Yen gave back nearly half of its weekly gains on Friday as hopes for a timely new U.S. stimulus plan faded fast when Democratic and Republican policymakers announced they were leaving Washington for their three-week summer recess.

Japan Economic News

The week started with a bank holiday in Japan, which gave U.S. Dollar bulls the upper hand that continued until Friday. There were some minor economic reports released in Japan, but nothing major that could sway Bank of Japan monetary policy or encourage more stimulus from the government.

On the positive side, Bank Lending, Current Account, Economy Watchers Sentiment, the Producer Price Index and the Tertiary Industry Activity gauge, exceeded expectations. M2 Money Stock fell short of the forecast.

US Economic News

The data out of the United States was a little move encouraging for the economy. Consumer Inflation rose 0.5% and Core Consumer Inflation jumped 0.6%. Both reports beat the forecast, which is a sign of improving economic growth.

Core retail sales also improved 1.9% versus a 1.30% estimate. The previous month was adjusted higher to 8.3%. Retail sales came in at 1.2%, below the forecast, but June’s numbers improved to 8.4%. The numbers exceeded pre-pandemic levels.

Finally, weekly initial jobless claims fell below one million for the first time since March.

Weekly Forecast

There are no major reports out of Japan or the United States this week although Monday’s Preliminary GDP data from Japan could fuel a response from traders. Traders are looking for a quarterly decline of 7.5%. A larger-than-expected drop could mean the need for more fiscal stimulus from the Japanese government since the Bank of Japan’s hands are tied.

The Treasury’s refunding is over so Treasury traders will have to rely on U.S. economic data to move yields. There is a lot of supply out there so rates may hold steady, but surprisingly weak economic data could drive yields lower which should benefit the Japanese Yen.

Furthermore, there is the problem with the lack of stimulus from the U.S. government. Traders may downplay the delay because they believe fresh stimulus is coming. However, they may have to wait until after the September 7 U.S. Labor Day holiday before a deal is reached. Nonetheless, Friday’s price action following the release of a solid U.S. retail sales report suggests this issue could increase the safe-haven appeal of the Japanese Yen.

The reports that could move yields next week include Revised Industrial Production and Empire State Manufacturing on Monday. Building Permits and Housing Starts on Tuesday.

Wednesday will feature the Fed minutes. Thursday’s Weekly Unemployment Claims and Friday’s Flash Manufacturing PMI reports could also influence the direction of yields.