USD/JPY Fundamental Forecast – October 5, 2016

The U.S. Dollar jumped against the Japanese Yen with the USD/JPY closing at 102.90, up 1.265 or +1.24%. This was its highest level since September 15. The move put the Forex pair in a position to challenge the September 14 main top at 103.351.

The rally was helped by increased demand for the dollar amid a strong rise in U.S. Treasury yields. Treasury rates rose in reaction to Monday’s better-than-expected ISM Manufacturing PMI data that drove investors to raise their bets on a rate hike by the end of the year.

Early Tuesday, comments from a Fed official also underpinned the U.S. Dollar. Richmond Federal Reserve President Jeffrey Lacker said there was a strong case for raising interest rates and that borrowing costs might need to rise significantly to keep inflation under control.

At the end of the day, the CME Group’s FedWatch indicator showed that U.S. interest rates futures suggested traders saw a 63 percent chance the Fed would raise rates at its December 13-14 meeting. This was up about 11 percent from the read shortly after the Fed meeting on September 21.

Also helping to underpin the dollar were comments from Federal Reserve Bank of Cleveland President Loretta Mester. On Monday, she reiterated her call for higher U.S. interest rates. However, Fed official William Dudley remained cautious in recent comments.

FORECAST

In the absence of domestic data from Japan, investors will be primarily focused on a slew of U.S. economic data.

The major reports are the ADP Non-Farm Employment Change at 1215 GMT and the ISM Non-Manufacturing PMI at 1400 GMT. Traders expect the ADP report to show 166K jobs were added to the economy in September. The Services PMI report is expected to show a 53.1 read, up from 51.4.

Better-than-expected numbers are likely to increase the chances for a Fed rate hike in December.

Minor reports include Trade Balance, Final Services PMI and Factor Orders.

The USD/JPY closed with strong momentum which should lead to a follow-through rally early Wednesday. The rally could pick up steam if U.S. Treasury yields continue to rise. This, of course, will depend on the strength of the two major U.S. economic reports.

Since the USD/JPY has closed higher for six days, traders may start to take profits, or begin to pare positions ahead of Friday’s U.S. Non-Farm Payrolls report. So investors should start watching for signs of sellers.