USD/JPY Fundamental Weekly Forecast – Traders Eyeing Treasury Yields, Stock Market Volatility

The Dollar/Yen finished lower last week with the price action driven by a combination of the tightening of the spread between U.S. Government bonds and Japanese Government bonds and flight-to-safety buying into the Japanese Yen.

U.S Treasury markets plunged last week leading to a narrowing of the spread between the 2-year and 10-year yields. This is often interpreted as a warning sign of a recession although it may take years for the economy to weaken enough for a recession to form. Furthermore, the relationship between the 2-year and 5-year Treasurys actually resulted in the formation of an inverted yield curve.

Demand for the U.S. Dollar also softened when a report in the Wall Street Journal suggested that the Federal Reserve is considering whether to reduce the number of future rate hikes.

According to the WSJ, members of the U.S. Federal Reserve are reportedly debating whether to signal a “wait-and-see” approach after a probable hike to the central bank’s benchmark rate at its December meeting. The WSJ said as part of the Fed’s emerging “data dependent” plan, it could chose to pause the regular quarter-point increases to the federal funds rate and not hike in March.

In U.S. economic news, minutes from the Fed’s November meeting showed that members are wary of the effect trade tensions and corporate debt could have on economic growth, a sign some took to mean that the FOMC could pause regular rate increases in 2019.

U.S. Federal Reserve Vice Chair Richard Clarida made clear in a discussion about inflation on December 3 that he remains more concerned about falling short of the central bank’s percent objective than running above it.

ISM Manufacturing PMI came in at 59.3, better than the 57.5 forecast and 57.7 previous reading. ISM Non-Manufacturing PMI, also beat the forecast, increasing to 60.7 from 60.3. It also beat an estimate of 59.1.

A weaker-than-expected U.S. nonfarm payrolls report setoff volatile reactions in several markets on Friday amid concerns the U.S. Federal Reserve may have to consider curtailing its plans to raise rates aggressively in 2019. The slow job growth suggests that economic growth may be losing steam.

According to the U.S. Labor Department, Nonfarm Payrolls increased by 155,000 for November while the Unemployment Rate again held at 3.7 percent, its lowest level since 1969. Economists were looking for payroll growth of 198,000 and the jobless rate to remain changed. Average hourly earnings rose last month, but the increase didn’t raise fears about an overheating economy. Average hourly earnings rose at a 3.1 percent pace from a year ago. The monthly earnings gain of 0.2 percent fell short of estimates for a 0.3 percent increase. The average work week edged lower by 0.1 hours to 34.4 hours.

Forecast

The direction of the USD/JPY this week will likely be determined by the movement of Treasury yields and the stock market. These two factors will be influenced by a number of U.S. economic reports and U.S. China relations.

In the U.S., investors will get the opportunity to react to the Producer Price Index (PPI) on Tuesday.  On Wednesday, the U.S. will release reports on Consumer Price Inflation (CPI). Friday will feature Retail Sales.

Stock market traders are a little nervous ahead of the opening because of simmering tensions between the U.S. and China. Although the two economic powerhouses have a little less than 90 days to reach a trade agreement, concerns were raised last week when Canadian officials arrested the CFO of a major Chinese technology company. Additionally, the U.S. is expected to announce the arrests of Chinese hackers of U.S. technology firms.

Basically, weaker stocks and heightened volatility should keep the pressure on the USD/JPY. Weaker than expected inflation data should also be a bearish influence on the Dollar/Yen. A stock market recovery coupled with better-than-expected inflation data should underpin the Forex pair.