USD/JPY Fundamental Forecast – December 5, 2016

The U.S. Dollar weakened against the Japanese Yen for a second day on Friday in reaction to the mixed U.S. Non-Farm Payrolls report. A potentially bearish technical chart pattern formed on Thursday also contributed to the selling pressure. Finally, generally weaker U.S. equity markets also helped boost the Japanese Yen.

The USD/JPY closed on Friday at 113.467, down 0.638 or -0.56%.

The U.S. Non-Farm Payrolls report showed that the economy added 178K jobs in November, in-line with expectations. Average hourly earnings came in at -0.1% and the unemployment rate fell from 4.9% to 4.6%.

The report was mixed because the average hourly earnings number suggests that new hires are getting low-paying jobs. The drop in the unemployment rate was triggered by a drop in the participation rate to 62.7%.

Although the Fed is likely to raise rates in December, the somewhat weak jobs report suggests that future rate hikes may be limited. This assessment caused U.S. Treasury yields to fall, making the dollar a less desirable investment.

Lower U.S. equity prices also weighed on the USD/JPY because the Japanese Yen is a funding currency. When stock go down, many investors who borrowed from Japanese banks are forced to buy back Yen to pay back the loans. This helps provide support for the Japanese currency.

Technically related pressure came from the formation of a closing price reversal top. Although this does not mean the trend is getting ready to turn down, it does tend to indicate that the selling is greater than the buying at current price levels.

Forecast

The direction of the USD/JPY will likely be determined by the outcome of the referendum in Italy.

Early returns show that Italian Prime Minister Matteo Renzi is losing the referendum. If he is forced to resign then look for a possible flight to safety rally into the U.S. Dollar.

If stocks sell-off sharply or if investors move money into Treasurys then this would be supportive for the Japanese Yen.

Until we know the extent of the damage, it’s too difficult to tell what investors will do. All we can say at this time is to expect volatility and a possible two-sided trade.

I’m going to focus on the U.S. stock indices. If they break sharply then I think they’ll take the USD/JPY down.