USDJPY : The week ahead

Comments from Yellen and the release of a foundation for President Donald Trump’s proposed tax overhaul also pushed inflation expectations higher, with U.S. Treasury yields rising to months- and years-long highs on Wednesday.

For the U.S. dollar, October is when we will begin to see the negative impact of hurricanes Harvey and Irma on the U.S. economy. Everyone from economists to Federal Reserve officials have warned that data will be distorted temporarily but based on the performance of the dollar and U.S. stocks, investors may not be prepared for the extent of potential weakness in these reports. Yes, the data will recover the following month but non-farm payrolls are due for release in the coming week and economists are only looking for payrolls to rise by 75K, which would be the weakest pace of growth in 6 months. This follows a steady trend of slower job growth in July and August that questions the hawkishness of the Federal Reserve. When the Fed met in mid September, they made it clear that tightening will continue. Their dot plot forecast showed a majority of policymakers favoring 1 more hike in 2017 followed by 3 hikes in 2018. However a number of the Federal Reserve officials who spoke this past week did not sound as enthusiastic about raising interest rates and data including the latest personal income, spending and PCE deflators were softer.

We’ll hear from more Fed Presidents in the coming week and perhaps their views will be different but even Yellen’s hawkish comments failed to lift the currency. Part of the problem is that while the Fed plans to raise interest rates, the market doesn’t expect them to do so until December and a lot can change between now and then. U.S. data may not recover as strongly or it may, but either way there’s plenty of time for investors to position for hike as December nears. For now the focus will be on the prospect of softer data and the promise of tighter policy in Europe, which is negative for USD/JPY and USD/CHF and positive for EUR/USD and GBP/USD.

Comment:

The fourth quarter begins with a mild rally in the U.S. dollar. Today’s U.S. economic reports were very strong with the ISM manufacturing index hitting a 13 year high. The data shows that factories are booming and prices are rising. Although part of this strength can be attributed to hurricane related supply chain disruptions and energy costs, there is still underlying strength in the manufacturing sector as we’ve seen similar improvements in the Philadelphia and Chicago regions – two areas not affected by the recent hurricanes. Construction spending also increased 0.5% in August and is likely to rise further on rebuilding efforts. These positive reports along with new record highs in stocks should have driven USD/JPY to 113 and while the pair got very close to that level post data, the gains were given back quickly as bond traders struggle to keep yields up. The beginning and end of the month/quarter are always tricky to trade but this week could be a challenging one for the greenback with non-farm payrolls expected to come in much lower. However between now and then, the market clearly prefers dollars over other currencies and as long as yields and stocks continue to rise, so will USD/JPY.

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