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James Hyerczyk

The Dollar/Yen finished a volatile week with a higher close. The trade was primarily to the downside with safe-haven demand driving the Japanese Yen higher. The catalysts were falling U.S. Treasury yields, heightened stock market volatility and fears of a global economic slowdown. Investors were also moving money into the Yen because they remained convinced the U.S. Federal Reserve may have made a policy error by tightening too fast.

The USD/JPY settled at 108.520, down 1.774 or -1.61%.

There was even a steep drop last week which drove the USD/JPY to 105.180. Traders said the price action can best be described as a “flash crash”. They are also saying the move was fueled by technical factors rather than fundamental factors. The thin-holiday volumes may have exacerbated the sell-off.

The Dollar/Yen mounted a comeback on Friday in reaction to the news that the U.S. and China had scheduled high level trade talks in Beijing on January 7-8. The rally was further supported by a strong U.S. jobs report for December which blew away the estimates. Shortly thereafter, Fed Chair Jerome Powell surprised investors when he reversed his hawkish talk in December with a much softer tone.


The USD/JPY rally could pick up steam this week if it gets help from rising Treasury yields and increased appetite for risk. Powell was dovish in delivering his message that the Fed will be flexible with all of its monetary policy tools, including the important balance sheet. If the market believes him then yields have a lot of ground to recover. This should lead to a widening of the spread between U.S. Government bonds and Japanese Government bonds which should make the U.S. Dollar a more attractive investment.

With the fear of higher interest rates lifted, stock buyers should continue to drive the market higher. This should reduce demand for the Japanese Yen as a safe-haven asset, providing support for the USD/JPY.

There is nothing major coming out of Japan this week. The major U.S. reports this week are the ISM Non-Manufacturing PMI report on Monday and Friday’s U.S. Consumer Inflation Reports.

The Fed minutes will be released on Wednesday and Fed Chair Powell is scheduled to deliver another speech on Thursday.

On Wednesday and Thursday, investors should pay close attention to the slew of Fed speakers. We want to see which speakers agree with Powell, and which see things differently. This should create some volatility. If all agree with Powell then this could mean the Fed will refrain from making any rate hikes in 2019.

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