Advertisement
Advertisement

USD/JPY Fundamental Weekly Forecast – Higher if Jump in Treasury Yields Offsets Stock Market Weakness

By:
James Hyerczyk
Published: Sep 7, 2020, 03:22 UTC

Essentially, higher U.S. Treasury yields and the lack of concern about the stock market weakness will be supportive for the USD/JPY.

USD/JPY

The Dollar/Yen rose last week, nearly recovering the entire loss from the previous week that was caused by the sudden resignation of Prime Minister Shinzo Abe. The Forex pair was supported by the news that Japan may have already found its new Prime Minister and that it will be business as usual going forward, and surprising strong U.S. manufacturing economic data.

Traders seemed to ignore a steep U.S. stock market sell-off that could’ve driven the safe-haven Japanese Yen higher. Helping to support the U.S. Dollar was a surge in U.S. Treasury yields on Friday.

Last week, the USD/JPY settled at 106.243, up 0.894 or +0.85%.

Japan’s Suga to Run in LDP Leadership Race – Reuters

Chief Cabinet Secretary Yoshihide Suga has indicated he intends to run for leadership of Japan’s ruling party, a source said on Monday, soon after a report emerged that he had won the backing of one of the party’s most powerful factions, according to Reuters.

The leader of the Liberal Democratic Party (LDP) will almost certainly become prime minister because of its majority in the lower house of parliament, replacing Shinzo Abe who on Friday said he was stepping down for health reasons.

US Factory Activity Accelerates as Orders Jump to More than 16-1/2-Year High

The USD/JPY is being underpinned for a second session after a report showed on Tuesday that U.S. manufacturing activity increased more than expected in August as new orders surged to their highest level in over 16-1/2 years. The numbers were good, but there are still some concerns because employment at factories continued to lag amid safety restrictions intended to slow the spread of COVID-19.

The upbeat report from the Institute for Supply Management (ISM) strengthened expectations for a sharp rebound in economic activity this quarter, though the outlook is uncertain as money from the government dries up. Manufacturing is not out of the woods yet as the coronavirus crisis lingers.

The ISM said manufacturers described sentiment as “generally optimistic, though to a lesser degree compared to July.”

Weekly Forecast

There was little reaction to the sell-off in the U.S. stock markets late last week, but it doesn’t mean investors weren’t watching. It could mean that they thought the move was a necessary correction so there may have been no need to seek protection in either the safe-haven U.S. Dollar or Japanese Yen.

A continuation of the stock market break this week could start to raise some concerns. At that point, we expect investors to start moving money into the Japanese Yen.

U.S. Treasury yields shot higher on Friday, propelled by a drop in the August unemployment rate and ahead of a big burst of supply this week.

The Dollar/Yen could firm if Treasury yields continue to rise sharply. This would increase the spread between U.S. Government bond yields and Japanese Government bond yields, making the U.S. Dollar a more attractive assets.

Essentially, higher U.S. Treasury yields and the lack of concern about the stock market weakness will be supportive for the USD/JPY.

Another unexpected steep plunge in the equity market could start to send investors into the safety of the Japanese Yen.

It all comes down to whether investors consider the stock market weakness a normal correction, or the start of a change in trend.

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

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.

Did you find this article useful?

Advertisement