USD/JPY Fundamental Weekly Forecast – Will Rising Treasury Yields Boost Demand for Dollar?

The direction of the USD/JPY the rest of the week is likely to be determined once again by Treasury yields and the stock market. These market are likely to be largely influenced by U.S.-China trade negotiations. However, investors will also get a chance to react to the latest Federal Open Market Committee Meeting Minutes and the U.S. Durable Goods Orders.
James Hyerczyk
USD/JPY

The Dollar/Yen finished higher, but faltered toward the end of the week in reaction to weaker-than-expected U.S. economic data. The uptrend was strong throughout the week with the buying driven by rising U.S. Treasury yields and increased demand for risky assets. The catalyst behind these moves were steady U.S. inflation data and optimism that the United States and China were moving closing to a deal that would bring an end to the trade dispute.

For the week, the USD/JPY settled at 110.466, up 0.705 or +0.64%.

Rising Treasury Yields Boost Demand for U.S. Dollar

U.S. Treasury yields finished higher despite the return of volatility late in the week. For the period, yields rose during four out of five trading sessions. This suggests that professionals weren’t fazed by the mixed economic data that grabbed the headlines at times last week, leading a few analysts to declare the U.S. economy had peaked.

Last week, U.S. 2-year Treasury yield settled at 2.52 percent, up 0.03 percent. The benchmark 10-year Treasury yield settled at 2.66 percent, up 0.03 percent and the 30-year Treasury yield finished at 3.00 percent, up 0.03 percent.

Rising U.S. Treasury yields helped widen the spread between U.S. Government bonds and Japanese Government bonds, helping to make the U.S. Dollar a more attractive investment.

Demand for Risk Leads to Demand for U.S. Dollar

The major U.S. stock indexes posted solid gains last week, bringing them to within striking distance of their all-time highs. Appetite for risk was strong, driven by continued optimism over a U.S.-China trade deal and an agreement to avert another government shutdown. There were a few pitfalls along the way, however, caused by mixed economic data.

U.S. Economic Data

On the strong side, the Bureau of Labor Statistics reported a surge in Job openings The JOLTS Job Openings report showed that U.S. job openings rebounded, reaching a record in December as the rate of those leaving jobs held steady, underscoring robust demand for workers. Core consumer inflation data was also steady although headline inflation came in weaker-than-expected.

On the weak side, U.S. Retail Sales and Industrial Production disappointed. Retail sales fell in December, dropping 1.2% over the prior month. This was also the biggest decline since 2009. Industrial Production fell 0.6%, missing the 0.1% estimate by a wide margin. Furthermore, the previous month was revised lower to 0.1%.

Weekly Forecast

Trading could be tight at the start of the week due to a U.S. bank holiday. The U.S. Treasury is closed as well as the New York Stock Exchange. This being the case, there’s not going to be a lot of guidance for traders on Monday.

The direction of the USD/JPY the rest of the week is likely to be determined once again by Treasury yields and the stock market. These market are likely to be largely influenced by U.S.-China trade negotiations. However, investors will also get a chance to react to the latest Federal Open Market Committee Meeting Minutes and the U.S. Durable Goods Orders.

U.S.-China trade talks will continue in Washington later this week after the sixth round of negotiations ended in Beijing on Friday. There were no signs of substantial progress, but both signs remained optimistic and this seemed to keep investors happy.

As far as the Fed minutes are concerned, investors are going to be looking reasons for the FOMC’s removal of the phrase “some further gradual increases in the target range” from the statement. Concerns were raised by the removal of the statement with some investors interpreting this to mean the end to the Fed’s tightening cycle. Others thought it was a technical adjustment as the Fed approaches the end of its tightening cycle. The minutes could offer an explanation for this adjustment.

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