USD/JPY Fundamental Weekly Forecast – Falling Treasury Yields Source of Pressure

After treading water most of the week as investors positioned themselves ahead of the Friday’s U.S. Non-Farm Payrolls report, the Dollar/Yen plunged after the release of disappointing jobs numbers. The jobs data was weak enough to put pressure on U.S. Treasury yields. This helped make the U.S. Dollar a less attractive investment, boosting demand for the Japanese Yen.

The USD/JPY closed the week at 110.421, down 0.888 or -0.80%.

Domestically, there were no major Japanese reports. However, in regards to the minor reports, the good news outweighed the bad news.

Year-on-year Housing Starts were up 1.9%, coming in much better than the previous -1.4%. Quarterly Capital Spending was up 4.5%, better than the 3.9% estimate. Final Manufacturing PMI came in at 53.1, beating the 52.0 estimate. Finally, year-on-year Retail Sales grew by 3.2%, up from 2.1%.

The spotlight was on the U.S. Dollar again last week and the greenback did not disappoint, falling to a 7-month low against a basket of currencies.

The USD/JPY was unpinned early in the week, driven by short-covering and position-squaring as investors reacted to oversold technical conditions and to expectations for a solid jobs report later in the week. Also helping to give the dollar a firm tone was a pair of economic reports. U.S. consumer spending recorded its biggest increase in four months in April and monthly inflation rebounded, pointing to firming domestic demand early in the second quarter.

The Core PCE Price index rose 0.2% on a monthly basis. This was better than the forecast and previous read, but some investors were disappointed because on an annual basis, inflation is still running below the Fed’s 2.0% target.

Personal Spending was up 0.4%, matching expectations and the Conference Board’s Consumer Confidence report came in at 117.9, below the 120.1 estimate.

Most of the selling pressure on the USD/JPY occurred on Friday after the release of a disappointing U.S. Non-Farm Payrolls report

The Non-Farm Employment Change showed the economy added 138K jobs in May, coming in well-below the 181K estimate. Average Hourly Earnings matched the estimate of 0.2% and the Unemployment Rate inched lower to 4.3% from 4.4%.

The jobs report was not weak enough to curtail the Federal Reserve’s plan to raise interest rates on June 14, but it likely means the central bank will limit the number of future rate hikes.

Forecast

There are no major economic reports from Japan this week. In the U.S., the major report is Monday’s ISM Non-Manufacturing PMI report.

Most of the focus this week will be on the direction of U.S. Treasury yields. The reaction to Friday’s U.S. Non-Farm Payrolls report suggests that investors believe the Fed will raise rates in June, but only raise rates one more time the rest of the year. This should continue to put pressure on the Dollar/Yen until investors can make the adjustment in their portfolios.