USD/JPY Fundamental Analysis – Forecast for the Week of December 5, 2016

Buyers continued to drive the U.S. Dollar higher against the Japanese Yen last week in reaction to expectations of higher U.S. interest rates. However, there were signs of the presence of sellers on the daily chart. This creates a potential divergence between long-term investors and short-term traders.

There were no major reports from Japan last week. This put the focus on U.S. data. A bullish tone for the U.S. Dollar was set early in the week with the release of the U.S. Third Quarter GDP report. It showed the economy grew by 3.2%. This was better than the forecast of 3.0% and the previous 2.9%.

The Conference Board’s Consumer Confidence report came in at 107.1, up substantially from 100.8. This survey was taken after Trump’s surprise win in the U.S. election so it may be an indication that consumers are showing support for Trump’s plan to rebuild the economy.

The ISM Manufacturing PMI report came in at 53.2, up from 51.9. This was another sign of an improving economy.

The week ended with the release of the U.S. Non-Farm Payrolls report. The report was mixed. The Non-Farm Employment Change was 178K. This was in line with the estimate, but data for September and October were revised to show that fewer jobs were created than previously reported.

Average Hourly Earnings came in down 0.1%, lower than the 0.2% estimate and the previous 0.4%. This essentially meant that wage growth for the month was just 2.5 percent, compared with expectations of 2.8 percent, unchanged from October.

The Unemployment Rate fell from 4.9% to 4.6%. This matched the lowest level since August 2007. Traders said part of the drop could be blamed on a decline in the labor force participation rate to its lowest level since June and still near 40-year lows.

Additionally, a broader measure of joblessness that accounts for the underemployed and discouraged workers also fell, declining from 9.5 percent in October to 9.3 percent in November, the lowest since April 2008. However, the number of workers counted not in the labor force surged by 446,000 to 95.06 million.

Forecast

Friday’s jobs report was the last major employment indicator before the Federal Open Market Committee’s interest rate decision on December 14. Currently, the market is assigning about a 93 percent chance that the Fed will raise rates 25 basis points.

The price action last week suggests that USD/JPY investors may have fully priced-in the rate hike and may now be focusing on futures rate hikes in 2017. The report suggests that the economy may be strong enough to handle only one rate hike next year.

The USD/JPY appears to be showing signs of weakening momentum so the Forex pair may be ripe for a pullback this week, especially if investors decide to start taking profits and squaring positions ahead of the Fed rate decision.

Additionally, investors will be watching the price action in the U.S. equity markets. If stocks weaken then the Japanese Yen should rally against the U.S. Dollar because it is a funding currency. Be careful buying strength this week because you may get trapped at a high if buyers don’t come in with same conviction they have shown over the last four weeks.