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James Hyerczyk

The Dollar/Yen closed higher last week with most of the gains attributed to a late session surge on Friday. Throughout the week, the Forex pair was rangebound. In fact, it has been range bound for 15 trading sessions. The price action suggests investors are content with interest rates and demand for risk at this time with investors showing little reaction to economic data.

Last week, the USD/JPY settled at 107.793, up 0.178 or +0.17%.

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The price action has been unusual. With the spread between U.S. Government bond yields and Japanese Government bond yields historically tight, there is very little interest in the carry trade.

When the yield differential is wide, bullish stock market investors prefer to borrow at low rates from Japanese banks and invest in U.S. stocks. Essentially, when stocks go up, the USD/JPY goes up and vice-versa. We’re seeing very little of that relationship at this time even with U.S. stocks up over 30% from their March lows.

Safe-haven demand is also unclear. It seems to change every day. Given the sideways price action throughout most of May, it’s hard to tell if investors are buying the U.S. Dollar or the Japanese Yen for protection.

Our technical work indicates the trend is up. On May 6 the USD/JPY reached its low for the month at 105.987. And on May 19, it hit its high for the month.

During May, we found out that Japan entered a recession and the Bank of Japan committed to more stimulus, but prices hardly budged. The U.S. Federal Reserve held interest rates and stimulus steady, while the U.S. government talked about another aid package. Meanwhile, the economy lost more jobs, but as the month came to an end, the pace of the job losses had slowed.

Weekly Forecast

There are no major economic releases from Japan this week. In the U.S., traders will get the opportunity to react to ISM PMI reports on Manufacturing and Services. The key report, however, will be Friday’s U.S. Non-Farm Payrolls report.

But what can the NFP report actually tell investors that they don’t know already know? People lost jobs during the coronavirus shutdown.

Will we see volatile price action this week? Doubtful. Will the USD/JPY remain rangebound? Probably. We may not see any major movement until we start to see the economic data from the second quarter, which could mean a rangebound trade until July.

Unless the BOJ or Fed makes a major change in policy or U.S. yields or JGB yields spike unexpectedly in either direction, I’m anticipating another week of rangebound trading.

Friday’s price action was impressive. The USD/JPY posted a dramatic closing price reversal bottom after President Trump went easy on China late Friday. Perhaps improving relations between the United States and China will be the spark to trigger a breakout to the upside. At least it’s something to watch for while the paint dries.

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

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