USD/JPY Fundamental Weekly Forecast – Higher-Yields, Strong Risk Sentiment Supportive for Dollar/Yen

The Dollar/Yen posted a two-sided trade last week, but after a promising start for the bulls, the early surge fizzled and the Forex pair closed lower. Driving the price action was choppy movement in U.S. Treasury yields which started out with a surge to a 10-month high on Monday, but ended the week with a slight drift lower.

Last week, the USD/JPY settled at 103.872, down 0.094 or -0.09%.

Stabilizing U.S. Treasury yields helped lift the U.S. Dollar to its highest level since December 10 against the Japanese Yen last Monday, though investors remained bearish on the greenback’s near-term prospects.

Treasury yields had jumped about 20 basis points in the previous week on expectations that new fiscal stimulus will boost economic growth and increase Treasury supply after Democrats won control of the Senate.

The catalyst for the jump in rates were the two elections in Georgia the first week in January, which sparked the return of a relation trade. The Georgia Senate run-off opened the door to the possibility of very significant additional stimulus.

After getting an initial boost from the Treasury surge, rates peaked along with the USD/JPY and drifted lower the rest of the week. The catalyst behind the weakness was the shedding of demand for riskier assets which drove investors out of risky currencies and equities and into the safe-haven Japanese Yen.

Weak U.S. economic data and concerns over President-elect’s new stimulus package also drove investors out of riskier assets and into the Japanese Yen.

President-elect Joe Biden outlined a $1.9 trillion stimulus package proposal last Thursday, saying bold investment was needed to jump-start the economy and accelerate the distribution of vaccines to bring the coronavirus under control.

Weekly Forecast

U.S. Treasury yields fell on Friday after retail sales data came in below economists’ expectations and following President-elect Joe Biden’s proposed $1.9 trillion stimulus program. Yields had jumped ahead of Biden’s announcement late on Thursday that he hopes to jump-start the weakened U.S. economy and accelerate the distribution of vaccines to bring the coronavirus under control with new funds.

But yields came back down following the announcement and dropped further after data on Friday showed worse-than-expected retail sales for December.

This week is going to see some of the same price action until investors decide on the direction of Treasury yields.

A risk-off scenario will drive yields lower as well as the USD/JPY. If investors decide that risk is back on then look for yields to rise, taking the U.S. Dollar higher against the Japanese Yen.

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