USD/JPY Fundamental Forecast – December 2, 2016

The USD/JPY is trading lower as investors squared positions ahead of Friday’s major U.S. Non-Farm Payrolls report. This is the last report on the labor market before the next Federal Open Market Committee meeting in about two weeks. The Fed Funds Indicator is showing the chances for a Fed rate hike of 25 basis points are about 95%.

The report is expected to show the economy added about 177K jobs in November. This is up from 161K the previous month. With the ADP report showing the private sector adding 212K jobs in November, I think the NFP headline number could come in well above the consensus number.

Average Hourly Earnings are expected to rise 0.2%, below the previous 0.4%. The Unemployment Rate is expected to remain unchanged at 4.9%.

On Wednesday, the USD/JPY posted a potentially bearish technical closing price reversal top. This chart pattern was confirmed early Friday. While this chart pattern does not indicate a change in trend is coming, it is a sign that the selling may be greater than the buying at current price levels.

On Thursday, the yield on the benchmark 10-year U.S. Treasury Note rose to trade at 2.4445 percent, while the yield on the 30-year U.S. Treasury Bond was also higher at 3.0986.

Despite the rising Treasury yields, the U.S. Dollar was under pressure. This indicates that the U.S. Dollar and Treasury yields are out of sync, at least temporarily. This could also be an indication that the U.S. Dollar is overvalued and due for a near-term correction.

The strength in the Japanese Yen is also related to the weakness in the U.S. stock indices because of the carry-trade. Since the Yen is a funding currency, any weakness in U.S. equities is likely to be supportive for the Japanese currency.

With the dollar no longer correlated with the Treasury market for the time being, I think the focus for USD/JPY traders will shift to the stock market. If stocks continue to break on Friday then look for the Dollar/Yen to weaken. If stocks resume their rally then the USD/JPY should weaken.

Because of the influence of Treasury yields and the stock market, traders should look for volatility and a possible two-sided trade on Friday until investors decide which fundamental factor they want to follow at this time.