USD/JPY Fundamental Analysis – Forecast for the Week of October 10, 2016

A steady rise in U.S. Treasury yields last week helped drive the U.S. Dollar higher against the Japanese Yen. The rally was all about the interest rate differential with the yield on the benchmark 10-year Treasury Note finishing at 1.7252 percent and the yield on the 30-year Treasury Bond also higher at 2.4615 percent. The 10-year Japanese Government Bond yield was 0.07%. The 30-year JGP yield was 0.51%.

The USD/JPY rallied to 104.155 before settling at 102.906, up 1.588 or +1.57%. Before Friday’s lower close, the Forex pair had run off a streak of eight consecutive higher closes.

U.S. interest rates and the U.S. Dollar were primary supported by better-than-expected economic data. The two bullish reports included the ISM Manufacturing PMI and the ISM Non-Manufacturing PMI. These two reports raised expectations for a sooner-rather-than-later interest rate hike by the Fed.

Friday’s U.S. Non-Farm Payrolls report drew mixed results from traders. U.S. Treasury yields were weaker following the report, stocks broke sharply as well as the dollar. This prompted a return to the Japanese Yen which helped the USD/JPY close lower on the last day of the week.

The jobs report showed the U.S. economy added 156,000 jobs in September. The unemployment rate ticked up to 5.0 percent. Traders had expected 177,000 new jobs and the unemployment rate to hold at 4.9 percent.

Average hourly wages pushed higher, rising 6 cents to an annualized rate of 2.6 percent. The average work week also inched up one-tenth to 34.4 hours. Another way to look at it shows average hourly earnings up 0.2%. This was better than the previous 0.1%, what just what investors had forecast.

FORECAST

The reaction by traders suggest that investors don’t know any more about the direction of U.S. interest rates than they did before the jobs report was released. To some, the jobs picture was a bit disappointing, but it wasn’t totally unexpected. Looking beyond the headline, wages and work hours went up as well as participation. That should be seen as a positive. Essentially, the report was not so strong to put a November rate hike on the table, but not so weak to take a December rate hike off the table.

Based on the reaction by the USD/JPY on Friday, investor sentiment is going to be the main market driver this week. Traders are either going to want risk or safety. Raising Treasury yields and rising stock prices will be two factors putting pressure on the Japanese Yen. Falling Treasury yields and weaker equity markets should support the Japanese Yen.

Traders will be watching the outcome of the next presidential debate on Sunday. If Clinton outperforms Trump, the Yen may feel pressure. If Trump comes out ahead then look for the Yen to weaken.

This week USD/JPY traders will also get the opportunity to react to the FOMC Meeting Minutes, Retail Sales, Producer Inflation and Consumer Sentiment. On Friday, FOMC Member Rosengren and Fed Chair Janet Yellen are scheduled to speak.

Basically, if risk is on then look for the USD/JPY to rally. If risk is off then look for a weaker USD/JPY.