USD/JPY Fundamental Weekly Forecast – Rising Yields, Risk-On Theme Will Set Bullish Tone

The Dollar/Yen rose sharply last week, boosted by a sharp rise in U.S. Treasury yields and increased appetite for risk. The catalysts behind the rally were upbeat data from China, strong U.S. labor market data and a stronger-than-expected start to U.S. quarterly earnings season. The “risk-on” theme was primarily fueled by dampened concerns over a global economic slowdown.

Last week, the USD/JPY settled at 112.013, up 0.295 or +0.26%.

Bearish Early in the Week

Japanese Yen buyers had the upper hand early in the week following the release of a pair of muted U.S. inflation reports and dovish minutes from the Fed.

On the economic front, U.S. consumer inflation increased by the most in 14 months in March, but the underlying inflation trend remained muted amid slowing domestic and global economic growth.

According to the U.S. Labor Department, the Consumer Price Index rose 0.4 percent. In the 12 months through March, the CPI increased 1.9 percent. Economists had forecast the CPI rising 0.3 percent in March and accelerating 1.8 percent year-on-year.

The Core CPI inched up 0.1 percent. In the 12 months through March, the core CPI increased 2.0 percent. The core CPI rose 2.1 percent year-on-year in February.

The Labor Department also reported that U.S. producer prices increased by the most in five months in March, but underlying wholesale inflation was muted.

The producer price index for final demand rose 0.6 percent last month. In the 12 months through March, the PPI rose 2.2 percent. Economists had forecast a reading of 0.3 percent in March and an increase of 1.9 percent on a year-on-year basis.

The core PPI increased 2.0 percent in the 12 months through March.

The latest minutes of the U.S. Federal Reserve’s March 19-20 policy meeting, showed most policymakers viewed price pressures as “muted,” but expected inflation to rise to or near the central bank’s 2 percent target. However, the minutes offered no surprises for investors so stock prices remained stable. If anything, the minutes reinforced the view that rates are likely to remain on hold for the foreseeable future.

Big Turnaround Late in the Week

The Dollar/Yen posted a strong turnaround late in the week after better than expected news about the labor market and on the back of stronger performance in U.S. equity markets.

The Labor Department also reported that the number of Americans filing applications for unemployment benefits dropped to a 49-1/2 year low the week-ending April 6. Initial claims for state unemployment benefits fell 8,000 to a seasonally adjusted 196,000. Traders were looking for an increase to 211,000.

The major stock indexes were headed for a weekly loss until Friday’s surge drove the S&P 500 Index 0.69% higher, the Dow Jones Industrial Average 1.04% better and the NASDAQ Composite up 0.49%.

The rally was fueled by a slew of positive corporate news that included strong earnings from J.P. Morgan Chase, which delivered better-than-expected results, Disney’s unveiling of a new streaming service, and the announcement that Dow member Chevron plans to acquire Anadarko Petroleum for $33 billion in cash and stock.

U.S. stock markets were also supported by stronger-than-expected exports data out of China, which helped dim worries over a possible economic slowdown in the world’s second largest economy.

Weekly Forecast

The direction of the USD/JPY during the holiday-shortened week will continue to be controlled by U.S. Treasury yields and the stock market. Overtaking the March 5 top at 112.137 could also trigger an acceleration to the upside.

The Dollar/Yen received a strong boost on Friday solidifying its strong weekly gains after U.S. government debt yields followed international rates higher as investors in the United States chased riskier assets. The Forex pair was also bolstered by a surge in shares of J.P. Morgan Chase after the banking giant released a report showing better-than-expected quarterly earnings.

The USD/JPY could continue to climb this week if yields keep rising and stocks jump on better-than-expected earnings surprises.