Weekly Analysis and Recommendations For USD/JPY Forecast:
The USD/JPY finished the week lower with most of the price action related to the carry trade. Friday’s U.S. Non-Farm Payrolls report created enough uncertainty to drive U.S. stock indices lower, helping to drag down the U.S. Dollar against the Japanese Yen.
Judging from Friday’s price action, it looks as if the direction of the U.S. equity markets will have a greater influence on the USD/JPY than the interest rate differential between Japanese and U.S. bonds.
The week-ended with the U.S. labor market showing some strength despite slow job growth. U.S. job growth slowed in August, but the unemployment rate dropped to a near 7 ½ year low and average hourly earnings accelerated, reviving the prospects of a Federal Reserve interest rate hike at its next Federal Open Market Committee meeting on September 17.
In other news last week, activity in Japan’s services sector expanded at the fastest pace in almost two years in August. This signals that companies have turned more optimistic about business conditions, which could be a sign of a rebounding economy.
Japan’s economy contracted in April – June as exports and consumer spending weakened. On Monday, September 7, Japan’s Final GDP report is expected to show a reading of -0.4%, unchanged from the previous quarter. The government, however, is counting on a return to growth in the current quarter to fulfill its pledge to revitalize the economy after a decade of stagnation and deflation.
Late last week, the IMF said that the Bank of Japan does not need to expand monetary policy in October even if it cuts its growth and price forecasts, as long as inflation expectations are well anchored.
Because of the U.S. bank holiday on Monday, volume was light on Friday and the response to the jobs data may have been muted. With the major players returning on Tuesday, USD/JPY traders should look for increased volatility and reaction to the job report numbers since investors will have had a three-day week-end to digest the data.
Traders should continue to monitor the price action in the U.S. equity markets because they are the primary driver of the direction of the USD/JPY. Declining equity prices mean rising Japanese Yen because of carry trade redemptions.
Empire provides in-depth analysis for each currency and commodity we review. Fundamental analysis is provided in three components. We provide a detailed monthly analysis and forecast at the beginning of each month. Then we provide more recent analysis and information in our weekly reports.
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