USD/JPY Fundamental Daily Forecast – Higher Stock Market Supporting Carry Trade

The Dollar/Yen closed higher on Wednesday in response to a potentially bullish chart pattern on the daily chart and increased demand for higher risk assets which made the low-yielding Japanese Yen a less-attractive investment.

The USD/JPY settled at 110.736, up 0.360 or +0.33%.

Volume was light as investors continued to position themselves ahead of Friday’s U.S. Non-Farm Payrolls report. This report could determine whether the Fed raises rates a third time before the end of the year. Currently, futures traders are calling it a 50/50 proposition.

There was only one report on Wednesday. According to ADP and Moody’s, U.S. private employers added 178,000 jobs in July, this came in just below the 183,000 jobs estimate. The U.S. Dollar Index broke to a 15-month low on the news, but most of this was caused by a sharp rise in the Euro. Japanese Yen investors had little reaction to the report.

Dollar/Yen traders also showed no reaction to the news that the Treasury Department gave no clues about whether it will issue longer-dated bonds.

All three major U.S. stock indexes managed to close higher on Wednesday. The rallies were primary led by the Dow Jones Industrial Average which broke above 22,000 for the first time. The Dow was boosted by Apple stock, which surged 4.73 percent after posting quarterly earnings results that substantially beat the estimates.

Rising stocks are supportive for the USD/JPY because of the carry trade.

Forecast

On Thursday, USD/JPY investors will be watching a series of fresh economic reports from the U.S. because of their potential impact on the Greenback. Anything that supports a weakening economy or lowers the chances for a Fed rate hike, should be considered bearish for the Dollar/Yen. However, losses will be limited unless the stock market starts to break.

Today’s reports include Challenger Job Cuts, Weekly Unemployment Claims, Final Services PMI, ISM Non-Manufacturing PMI and Factory Orders.

The most important report is the ISM Non-Manufacturing PMI. It is expected to come in at 56.9, below the previous 57.4 read.

The daily chart indicates that taking out 110.967 could trigger a move into 111.640 and 112.190. On the downside, a break under 109.909 could fuel a steep sell-off.