USD/JPY Fundamental Weekly Forecast – U.S. Economic Data, Virus Worries Will Dictate Direction

The Dollar/Yen hit a seven-week low last week as investors nervous about the spread of coronavirus in the United States piled into the safe-haven currency. Most of last week’s losses occurred on Friday when the Japanese Yen posted its largest daily gain since May 2017.

One of the catalysts behind last week’s sell-off in the Dollar/Yen was a steep break in the major U.S. equity markets. For the week, the blue chip Dow Jones Industrial Average fell more than 12% – its biggest weekly percentage loss since 2008. On a points basis, the Dow fell more than 3,500 points, far and away its largest weekly loss ever. It also ended the week in correction territory, down 14.1% from an intraday record high set February 12.

The benchmark S&P 500 Index lost 11.5% week to date in its worst weekly performance since the financial crisis over 10 years ago. The index finished about 13% from its all-time high notched just last week. The technology-based NASDAQ Composite lost 10.5% this week and was nearly 13% below a record high.

Another reason for the Dollar/Yen weakness were expectations of an earlier than expected rate cut by the U.S. Federal Reserve. Additionally, a pledge by the Federal Reserve late Friday eased the market’s pain slightly into the close for the week. Fed Chairman Jerome Powell said in a statement the central bank will “act as appropriate” to support the economy amid the coronavirus outbreak.

Dollar/Yen traders also responded to a steep drop in U.S. Treasury yields, which plunged to a fresh record low on Friday as investors dumped riskier assets and searched for safer options amid the coronavirus outbreak. The move tightened the spread between U.S. Government bond yields and Japanese Government bond yields, making the U.S. Dollar a less-attractive investment.

The benchmark rate traded at 1.116%, marking the first time ever it traded below 1.20%. The 10-year yield tumbled more than 30 basis points last week.

Last week, the USD/JPY settled at 108.064, down 3.511 or -3.15%.

Weekly Forecast

This week could feature much of the same price action that we saw last week, but this time the direction of the USD/JPY could be influenced by both worries over the spread of coronavirus and economic reports from the United States.

In the U.S., the first major report is Monday’s ISM Manufacturing PMI. It is expected to come in at 50.5, but will probably come in much lower after China’s reported a record low in its PMI reports over the weekend.

On Wednesday, the key reports are the ADP Non-Farm Employment Change and ISM Non-Manufacturing PMI. The first report will give us the first peak at whether the coronavirus had an effect on private sector employment. It is expected to show the private sector added 170K jobs in February.

Friday features the U.S. Non-Farm Payrolls report. Non-Farm Employment Change is expected to show the economy added 185K jobs last month. Average Hourly Earnings are expected to have risen 0.3% and the Unemployment Rate is expected to have dipped to 3.5%.

Traders know China’s data will be weak. What they don’t know is how China’s weakening economy has influenced the U.S. economy. We may not even know until the March numbers are released in April.

Nonetheless, traders are still pricing in a 100% chance of a Fed rate cut, hoping central bankers make a move before the data confirms economic weakness.