USD/JPY Fundamental Forecast – December 1, 2016

The USD/JPY had a volatile session on Wednesday as investors reacted to a combination of major factors including OPEC’s decision to curb output and robust U.S. economic data. The buying was strong enough to take out last week’s high while putting the Forex pair in a position to challenge the psychological 115.00 level.

Ultimately, it was the sharp rise in U.S. Treasury yields that drove the U.S. Dollar higher against the Japanese Yen. U.S. Treasury yields rose on inflationary concerns due to a sharp rise in crude oil prices. The rise in yields helped increase the interest rate differential which made the U.S. Dollar a more attractive investment.

Crude oil futures surged over 10 percent on Wednesday after major producers OPEC and Russia agreed to a deal to cut supply in an effort to drain the global supply glut. The new deal would reduce output by around 1.2 million barrels per day from January 2017. That would take its output to January 2016 levels.

In the U.S., stronger-than-expected ADP private sector jobs data also helped underpin the U.S. Dollar. This report likely indicates that Friday’s U.S. Non-Farm Payrolls report will come in on the high end of the estimates. This report showed the private sector added 212K jobs in November versus an estimate of 161K. Personal Spending, Personal Income and the Chicago PMI also came in strong.

Forecasts

After an initial surge due to the strong upside momentum into the close, the USD/JPY is trading a little weaker early Thursday. Traders are reacting to a Japanese industrial production report that rose for a second straight month in November.

The early weakness to the data is not likely to have long-term implications on the USD/JPY. Overbought technical factors may have also contributed to the weakness as well as general position-squaring ahead of Thursday’s fresh economic data and Friday’s major U.S. Non-Farm Payrolls report.

In other domestic news, Japanese Capital Spending fell 1.3%, Final Manufacturing PMI was 51.3 and the 10-year Bond Auction came in at 0.03%.

In the U.S, investors will get the chance to react to several major and minor reports. The major reports are Weekly Unemployment Claims and ISM Manufacturing PMI. Unemployment claims are expected to come in at 252K. The ISM report is expected to show an increase to 52.1, up from 51.9.

Minor reports include Challenger Job Cuts, Final Manufacturing PMI, Construction Spending and ISM Manufacturing Prices.

Investors have to be careful today buying strength because of the possibility of position-squaring ahead of Friday’s U.S. Non-Farm Payrolls report.