USD/JPY Fundamental Weekly Forecast – Tight Labor Market, Rising Inflation Supportive; Omicron Wildcard
The Dollar/Yen closed lower last week as a tightening of the spread between U.S. Government bonds and Japanese Government bonds made the U.S. Dollar a less-attractive investment. U.S. Treasury yields were pressured by investor concerns around the omicron variant and the Federal Reserve’s plans to potentially taper faster than expected.
Last week, the USD/JPY settled at 112.837, down 0.506 or -0.45%. Invesco CurrencyShares Japanese Yen Trust (FXY) ETF finished the week at $83.29, up $0.22 or +0.26%.
U.S. Treasury yields were further pressured by a mixed U.S. Non-Farm Payrolls report that revealed a disappointing headline number. However, a drop in the unemployment rate signaled a tightening labor market, keeping the Fed on track for a faster tapering of stimulus.
Omicron Worries Increase Yen’s Safe-Haven Appeal
U.S. health officials last Wednesday confirmed the country’s first case of the new, heavily mutated COVID-19 Omicron variant in California. Bond yields had a muted reaction to the news, suggesting it may not be severe.
Investors will continue to watch for developments on the new omicron coronavirus variant, with uncertainty around its rate of transmissibility and fears that it could evade vaccines. However as of Friday’s close, the evidence doesn’t suggest Omicron is a game-changer in terms of implementation of new restrictions.
The USD/JPY could reverse to the upside this week if Omicron proves to be milder than the Delta variant.
Fed Policy Developments Setting the Tone
Although the U.S. Federal Reserve is not scheduled to meet until December 14-15, comments from Chairman Jerome Powell have already struck a chord with Dollar/Yen investors. Powell indicated in a testimony in front of Congress last Tuesday that the central bank may quicken the pace of its asset tapering schedule.
Powell said that he thought the Fed could pull back its bond-buying program faster than the $15 billion-a-month schedule announced in November.
“I think that the taper need not be a disruptive event in markets. I don’t expect that it will be. It hasn’t been so far. We’ve telegraphed it,” Powell said during Congressional testimony last Wednesday.
This week, USD/JPY traders will be monitoring Omicron developments, stock market volatility and Friday’s U.S. Consumer Inflation (CPI) data.
Throughout the week, investors weighed the potential fallout from Omicron after the COVID-19 variant’s spread led to fresh lockdowns in Europe and fanned fears of a hit to global economic growth. However, over the weekend, South African officials said there are no signs that could prompt a panic as infections have been mild.
Omicron is a wildcard but U.S. health officials said Sunday that while the coronavirus variant is rapidly spreading throughout the country, early indications suggest it may be less dangerous than delta, which continues to drive a surge of hospitalizations.
The key report this week is Friday’s Consumer Inflation (CPI) and Core CPI reports. However, given that Powell and other Fed policymakers are leaning toward tighter policy, it really shouldn’t matter what the reading shows.
Similarly, last Friday’s U.S. Non-Farm Payrolls report offered mixed results with a headline miss and a lower unemployment rate. The disappointing jobs growth shouldn’t stop the Fed from moving forward with its plans to increase tapering because the drop in the unemployment rate to a 21-month low indicates a tight labor market.