USD/JPY Fundamental Forecast – October 6, 2016

The U.S. Dollar closed higher against the Japanese Yen on Wednesday for the seventh straight session. The Forex pair reached its highest level since September 6 before finishing at 103.509, up 0.609 or +0.59%. The strong close has put the USD/JPY in a position to challenge the September 2 top at 104.316.

Fundamentally, increased demand for higher risk assets is behind the rally. However, there is a group of traders giving credit to technical breakout on the daily charts for the price surge.
Simply stated, the rise in U.S. government bond yields is helping to make the U.S. Dollar a more attractive investment. Bond yields are rising this week because of better-than-expected U.S. economic data and hawkish comments from Fed officials.

After reaching a bottom last week, the Dollar has picked up strength versus the Japanese Yen for a number of reasons. The first wave of buying came in after OPEC agreed to a deal to cut production. This boosted crude oil as well as demand for risky commodities. The rally gained traction earlier this week with the release of a stronger than expected U.S. ISM Manufacturing PMI report.
Comments from Fed officials helped increase the chances for a December rate hike on Tuesday. On Wednesday, traders had a mixed reaction to the weaker-than-expected ADP Non-Farm Employment Change report, but this was quickly offset when the ISM Non-Manufacturing PMI figures for September came in better than expected. The figure came in at 57.1, the highest since December, beating the 53.1 estimate
A rally in the U.S. equity markets on Wednesday also boosted demand for higher-yielding assets which helped lend support to the rally by the USD/JPY.

Today’s session begins with the USD/JPY in a strong position to continue the rally. Technical traders are going to have to decide whether to follow the strong upside momentum into 104.316 over the near-term, or begin to take profits and pare positions ahead of Friday’s U.S. Non-Farm Payrolls report.
By taking profits, investors will be expressing their uncertainty over the strength in the U.S. labor market. By holding onto this week’s gains, traders will be saying that the reports earlier this week were probably good enough to convince the Fed that the economy is strong enough to handle a rate hike.

The report schedule is light today with the Challenger Job Cuts report due at 1130 GMT and the Weekly Unemployment Claims report at 1230 GMT.

Look for buyers to probe the upside early in the session, but if the buying dries up quickly then don’t be surprised by a reversal to the downside. The market has been driven higher this week by technical momentum and strong economic reports. Without the reports today, all traders will have left is momentum.

If the buying isn’t strong enough to sustain the momentum then look for an early turnaround to the downside.

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