USD/JPY Fundamental Daily Forecast- USD Bulls Worried About Yellen’s Replacement

The Dollar/Yen is trading lower early Wednesday. Position-squaring and profit-taking ahead of today’s U.S. economic data and speech by Fed Chair Janet Yellen may be behind the price action. Traders are also lightening up ahead of Friday’s U.S. Non-Farm Payrolls report.

The Forex pair put on a strong performance early in the session on Tuesday, but sellers came in as the Dollar/Yen neared last week’s high at 113.251.

Driving the market higher recently has been rising Treasury yields, increased expectations for a Fed rate hike before the end of the year and strong demand for higher risk assets.

On Tuesday, the USD/JPY settled at 112.831, up 0.080 or +0.07%. At 0610 GMT, the Forex pair is trading 112.446, down 0.385 or -0.34%.

Forecast

There is no change in the major fundamentals so the current weakness is related to price action. It’s not wrong for investors to book profits even when the fundamentals are stacked in their favor.

I said yesterday that there are three key events that could cause issues with the bullish dollar, rising Treasury yields and increased demand for higher risk assets. These are the main factors driving the USD/JPY higher.

The three factors are North Korea, issues with the tax reform plan and the sacking of Fed Chair Janet Yellen and the selection of her successor. Well it looks like number 3 is raising concerns and this is encouraging investors to lighten up a little on the U.S. Dollar.

There is speculation that U.S. President Donald Trump’s choice for the next Fed chair could be a less hawkish candidate than some had expected.

According to Politico, U.S. Treasury Secretary Steven Mnuchin favors Fed Governor Jerome Powell over former governor Kevin Marsh. Powell is seen as more dovish than Warsh, who has criticized the Fed’s bond-buying program in the past. A more hawkish Fed candidate would likely drive the U.S. Dollar higher.

In other news, there are no major economic reports from Japan.

On Wednesday, the Japanese Yen is likely to be influenced by trader reaction to a number of economic reports including ADP Non-Farm Employment Change, Final Services PMI and ISM Non-Manufacturing PMI. Fed Chair Janet Yellen is also scheduled to speak.

The ADP report is often used to predict the outcome of the employment change number in the Non-Farm Payrolls report. It is expected to show the private sector of the economy added 131K jobs in September.

A larger-than-expected number should boost the chances of a rate hike and underpin the USD/JPY. However, we have to assume that this has already been priced into the market.

The ISM Non-Manufacturing PMI report is expected to come in slightly better than the previous report at 55.5. Finally, investors will be listening to Fed Chair Yellen for clues about monetary policy and the direction of interest rates.

We could see a knee-jerk reaction to the reports today with the primary focus turning toward Trump’s selection for Yellen’s replacement. Uncertainty over his choice could weaken the USD/JPY.