USD/JPY Fundamental Analysis – Forecast for the Week of May 1, 2017

The Dollar/Yen posted a strong gain last week, driven by strong demand for higher-yielding assets and a sell-off in safe haven assets like the Japanese Yen, The primary catalysts for the bullish tone were the favorable outcome of the French election, rising U.S. Treasury yields and a sharp increase in U.S. equity prices.

The USD/JPY finished the week at 111.489, up 2.459 or +2.26%.

The Japanese Yen plunged early in the week after the release of the first-round results of the French presidential election. Traders reacted positively as the market’s favored candidate moved on to the next round in the election process. The news sparked a significant unwinding of safe-haven trades.

According to the figures, centrist Emmanuel Macron finished first in the voting while far-right leader Marine Le Pen came in second. The markets are convinced that Macron will win the presidency and because of this they had no reason to maintain their long Japanese Yen positions.

The liquidation of safe haven U.S. Treasury Bonds and Notes also drove U.S. Treasury yields. This helped widen the interest rate differential between U.S. Bonds and Japanese Government Bonds, making the U.S. Dollar a more attractive investment.

Rising U.S. equity prices, driven by increased demand for risk and robust corporate earnings, also pressured the Japanese Yen because of the carry trade.

In other news, the Bank of Japan stood pat on interest rates at its monetary policy meeting. The BOJ also raised its economic assessment, increasing its GDP growth forecast for the country’s fiscal year, but it lowered its core CPI forecast slightly.

Forecast

This week, the markets will be dominated by news from the U.S. However, investors should keep an eye on North Korea because of events that took place over the week-end. If the situation escalates, investors will flock into the safety of the Japanese Yen.

On Monday, Treasury Secretary Mnuchin is scheduled to speak. This is important because he may talk about trade issues. Traders will also get the opportunity to react to the latest data on ISM Manufacturing PMI.

On Wednesday, investors will get the opportunity to react to the latest U.S. Federal Reserve’s Federal Open Market Committee’s interest rate decision and monetary policy statement. The central bank is not expected to raise rates at this meeting, but could give strong hints about the timing of the next rate hike in its monetary policy statement.

On Friday, the U.S. will release its latest report on Non-Farm Payrolls. The key number will be Average Hourly Earnings. It is expected to show a rise of 0.3%. Fed Chair Janet Yellen is also scheduled to speak on Friday.

Greater demand for higher risk will continue to support the USD/JPY. Traders should watch the events in North Korea, or for a sell-off in U.S. equity markets to trigger a break.