USD/JPY Fundamental Analysis – Forecast for the Week of November 28, 2016

The U.S. Dollar surged against the Japanese Yen last week as investors continued to increase bets for higher U.S. interest rates. Additionally, the rising stock market also pressured the Yen because it is a funding currency. With rates negative in Japan, U.S. stock traders are borrowing from Japanese banks, selling the Yen then investors the dollars in the equity markets.

The USD/JPY finished the week at 113.179, up 2.271 or +2.05%.

Last week, the dollar was support by a sharp jump in U.S. Durable Goods Orders, steady Weekly Unemployment Claims and firm Consumer Sentiment.

The Fed meeting minutes indicated that policymakers believe the economy was strengthening enough to warrant a rate hike before the end of the year.

The Durable Goods report showed a whopping 4.8% gain versus a 1.2% estimate. Weekly Unemployment Claims came in higher than expected, but the previous week, it had hit a 43-week low. Its downtrend remains consistent with a tightening jobs market, however.

Consumer Sentiment was also stronger-than-expected, suggesting consumers viewed Trump’s election as positive for their personal finances and the country’s economic growth.

Forecast

Rising U.S. Treasury yields and stock indices should continue to support the USD/JPY. However, investors should watch these outside markets carefully this week. Last week was a holiday shortened week so when the major players come back to work on Monday, they may not be willing to chase the stock market higher. If they are sellers then stocks will likely break, taking the USD/JPY with them.

Chart-watchers also think the USD/JPY is overbought and they are looking for any excuse to book profits after the recent three-week surge in prices. The main range this year is 121.678 to 98.887. Its retracement zone is 110.283 to 112.972. The market is currently testing the upper level of this zone. So this is a good price for some investors to start thinking about booking profits.

I’d pay close attention to the price action and order flow at 112.972 this week. I think that trader reaction to this price will determine the direction of the market this week.

The key reports include U.S. Preliminary GDP on Tuesday. The ADP Non-Farm Employment Change on Wednesday. The ISM Manufacturing PMI on Thursday and the U.S. Non-Farm Payrolls report on Friday.

There are no major reports in Japan this week.

Be careful chasing the USD/JPY higher this week. The Forex pair is ripe for profit-taking especially if stock investors decide to take profits ahead of Friday’s U.S. Non-Farm Payrolls report.