Yahoo Finance USD/JPY Fundamental Weekly Forecast – Rising Treasury Yields Could Flip USD/JPY Higher
The dollar hit a 3-year low against the Japanese Yen last week despite surging U.S. Treasury yields and a rebound in global equity markets. The move may have been fueled by inflation concerns in the U.S. as well as worries about the huge U.S. current and budget deficits.
The USD/JPY settled at 106.287, down 2.470 or -2.27%.
The move prompted Chief Cabinet Secretary Yoshihide Suga to say the Japanese government would watch moves in the market and noted that foreign exchange stability was key.
In other news, the reappointment of Haruhiko Kuroda as Bank of Japan governor and the nomination of BOJ executive director Masayoshi Amamiya and Waseda University professor Masazumi Wakatabe as deputy governors were seen certain to keep the central bank on an ultra-loose policy path. The news, however, had little impact on the price action.
Some investors blamed the worst weekly drop in the U.S. Dollar since February 2016 on the breakdown in correlation between the U.S. Dollar and Treasury yields. The dollar’s weakness came as U.S. Treasury yields hit four-year highs and as stronger-than-expected U.S. inflation bolstered bets that the Federal Reserve could increase interest rates as much as four times this year.
The counter-intuitive price action left investors and analysts bewildered, as higher Treasury yields are normally associated with a stronger dollar.
Other investors said Treasury yields are being driven higher not by expectations for stronger growth, but by fears about fiscal instability and inflation spiraling out of control. This may be the reason an inverse correlation has emerged between the dollar and long-term Treasury yields.
In other news, U.S. consumer prices rose considerably more than expected in January, fueling fears that inflation is about to turn dangerously higher.
The Consumer Price Index rose 0.5 percent last month against projections of a 0.3 percent increase, the Labor Department reported last Wednesday. Excluding volatile food and energy prices, the index was up 0.3 percent against estimates of 0.2 percent.
The report indicated that price pressures were “broad-based,” with rises in gasoline, shelter, clothing, medical care and food.
Forecast
The USD/JPY will continue to be influenced this week by investor sentiment towards the U.S. Dollar, U.S. Treasury yields, higher-yielding assets and concerns over inflation.
Last week, the Japanese Yen rose on worries over rising U.S. inflation. The move seemed counter-intuitive because U.S. Treasury yields rose to a four-year high. I don’t know if investors are going to continue to respond this way this week. If Treasury yields continue to soar then at some point, this may make the U.S. Dollar a more attractive investment.major market-moving event this week is likely to be the Federal Open Market Committee Minutes on Wednesday. They are expected to provide insight into how many interest rate hikes to expect from the Fed in 2018. A hawkish Fed could have a positive influence on the USD/JPY.
This article was originally posted on FX Empire
