USD/JPY Fundamental Weekly Forecast – FOMC Member Speeches Will Move the Market This Week

The Dollar/Yen finished higher last week, despite giving up gains on Friday with the formation of a potentially bearish closing price reversal top. The Greenback was primarily driven all week by improving economic data, rising Treasury yields and increased expectations for a Fed rate hike in December.

The USD/JPY settled at 112.624, up 0.168 or +0.15%.

The Dollar/Yen rose to its highest level since July 14 as Treasury yields rose after a strong reading for U.S. manufacturing activity hardened expectations for U.S. interest rates to rise by the year-end. ISM Manufacturing PMI data hit a 13 ½ year high with a read of 60.8, better than the 57.9 forecast. Later in the week, ISM Non-Manufacturing PMI also beat the estimate with a read of 59.8, up from 55.3 last month.

On Friday, a Labor Department report showed nonfarm payrolls fell by 33,000 jobs last month amid a record drop in employment in the leisure and hospitality sector. But the unemployment rate fell to 4.2 percent, the lowest since February 2001.

On an annualized basis, average hourly earnings rose to 2.9%. In September they increased 12 cents, or 0.5 percent. The figures for August were revised 0.2 percent.

Economists had forecast a gain of 90,000 jobs in September. The unemployment rate was estimated at 4.4%. Month over month average hourly earnings were forecast at 0.3% and year over year hourly earnings were estimated at 2.5%.

The U.S. Dollar initially rose against a basket of currencies in response to the unexpected rise in wages, however, gains were offset by a report that North Korea is preparing to test a long-range missile. This drove investors into the safety of lower-risk assets including gold and the Japanese Yen.

Forecast

There are no major reports from Japan this week. In the U.S., there are no major reports until Wednesday when the U.S. Federal Reserve releases its monetary policy minutes. Therefore, we could see volatility and a two-sided trade related to Friday’s jobs report or reports that North Korea is planning another missile test.

On Thursday, the U.S. will report on producer inflation. On Friday, the key reports will be consumer inflation and retail sales.

PPI is expected to come in up 0.4%. CPI is expected to come in up 0.6%. Core CPI is estimated to rise 0.2%.

With the chances of a Fed rate hike in December at about 83% according to the Fed Funds Indicator, weaker than expected PPI and CPI data will probably drive this down a little, but I don’t think it’ll be enough to derail the Fed’s plan to raise rates.

Traders will also get the opportunity to react a speeches from several Federal Open Market Committee members including Kashkari, Kaplan, Brainard, Powell, Evans and Kaplan. We should learn from these speeches how the FOMC members feel about a Fed rate hike before the end of the year, given last Friday’s mixed U.S. Non-Farm Payrolls report.