USD/JPY Fundamental Forecast – January 6, 2017

The Dollar/Yen closed lower on Thursday in response to weaker-than-expected U.S. economic data and a huge plunge in the dollar against the Chinese Yuan.

The USD/JPY finished the session at 115.345, down 1.875 or -1.60%. For the week, the Forex pair is down 1.634 or -1.40%.

The U.S. Dollar lost ground on Thursday in response to a drop in U.S. Treasury yields. Yields have fallen back all week since reaching their highest levels in two years in December. Traders blamed uncertainty about the incoming Trump administration as one of the reasons why yields have fallen. Investors are taking protection in Treasurys and gold.

According to reports, the People’s Bank of China may have come in and told state-backed companies to sell U.S. Dollars. China is working to stem the flow of capital out of the country and stabilize the currency ahead of the Lunar New Year at the end of the month. Chinese banking authorities ramped up defense of its currency by raising the value of its official guidance rate by the most since the Yuan was revalued in 2005.

In economic news, the ADP Non-Farm Employment Change report came in at 153K for December, far below the 171K estimate and November 215K increase. Weekly Unemployment Claims hit a 43-year low at 235K.

Final Services PMI was 53.9, slightly better than the 53.4 estimate and previous read. ISM Non-Manufacturing PMI was 57.2, unchanged from the previous and above the estimate.

Forecast

On Friday, investors will shift their focus on the U.S. Non-Farm Payrolls report. It is expected to show the economy added 175,000 jobs in December. This is slightly below the previous 178,000. The unemployment rate is expected to rise slightly from 4.6% to 4.7%. Hourly Average Earnings are expected to come in at 0.3%, better than the previous -0.1% for November.

The U.S. Trade Balance deficit is expected to remain relatively unchanged at $42.2 billion. Factory Orders are forecast to drop by 2.1% after rising 2.7% the previous month.

Later in the session, investors will get a chance to react to a speech by FOMC Member Charles Evans. He is likely to comment on the NFP report and could talk about Trump’s fiscal stimulus plans and their possible effects on Fed policy.

Chart-wise, the trend turned down on the daily chart on Thursday. If there is follow-through selling through 115.055 then we could see the start of a wash-out into 112.828. We could see an early rally today then a sell-off. This will be a sure sign that the selling is greater than the buying at current price levels.