USD/JPY Fundamental Weekly Forecast – U.S. Treasury Yields Controlling the Price Action

The Dollar/Yen posted a strong gain last week, supported by rising U.S. Treasury yields. The catalyst behind the strength was the passing of the U.S. tax reform bill.

The USD/JPY settled at 113.252, up 0.667 or +0.59%.

Mixed U.S. economic data may have limited gains. News from the Bank of Japan failed to impress investors. The widening of the spread between U.S. Government Bonds and Japanese Government Bonds made the U.S. Dollar a more attractive investment.

Last week, the 10-year Treasury yield reached a nine-month high of 2.504 percent. The Two-year yield ended the week near its nine-year high at 1.895 percent. The five-year yield touched 2.254 percent, which was the highest since April 2011.

The five-year to 30-year part of the yield curve was over 1 basis point flatter at 58 basis points. It hit 51.9 basis points earlier in the week on Monday which was the flattest since October 2007, Reuters and Tradeweb data showed.

Traders and investors had piled into “curve flattener” bets on expectations the Federal Reserve will raise short-term rates further and long-term inflation would stay tame. On the week, the gap between five-year and 30-year yields grew by nearly 5 basis points, which was the biggest such move since late July.

Bank of Japan

The Bank of Japan held its monetary policy steady, as inflation is still far from the targeted 2 percent despite a growing economy.

At the end of its two-day policy meeting, the central bank said it is maintaining its short-term interest rate at minus 0.1 percent and the target for the 10-year government bond yield at zero percent.

“Japan’s economy is expanding moderately,” the BOJ said in a statement.

Forecast

Trading conditions are going to be thin this week as most of the major players take to the sidelines until the start of 2018. The low volume could lead to periodic volatility. The price action will continue to be driven by the direction of U.S. Treasury yields.

Early Tuesday, BOJ Governor Kuroda is scheduled to speak. Traders will also get the opportunity to react to reports on Japanese Household Spending, National Core CPI, Tokyo CPI, Unemployment Rate, Housing Starts, Preliminary Industrial Production, Retail Sales and BOJ Core CPI.

The Bank of Japan will also release its Monetary Policy Meeting Minutes and its Summary of Opinions.

On Wednesday, the Conference Board will release a report on U.S. consumer confidence. On Thursday, the major report will be weekly unemployment claims.

Minor reports include S&P/CS Composite-20 HPI, the Richmond Manufacturing Index, Pending Home Sales, the Goods Trade Balance, Preliminary Wholesale Inventories and Chicago PMI.