With dynamic news flow adding to a heightened sense of US political risk and important economic data releases at home, the Yen looks to rise this week relative to the Dollar. In recent trading periods, the Dollar has strengthened relative to the Yen, changing the contour of the 2017 trend and gaining new footing in the midst of what had been a year long slide.
However, it could only be a temporary respite as improving fundamentals for Japan could aid it in marching higher versus the Dollar.
For binary traders, we receive a fresh round of unemployment data from Japan on Monday night in the US, and traders are receommended to monitor this for surprises in the data. As always, traders should also monitor the near constant stream of news from the US to watch for any turns in the debt ceiling debate or news regarding US trade policy. Both of those topics are very consequential for the USDJPY pair.
The current and historical driver for this pair is the US Dollar, and it has been quite a ride for the greenback. Broadly speaking, Dollar rallies have been uncommon and anemic, and the mood has remained bearish. The dollar index (DXY) had seen the slope of its descent get even steeper over the last two weeks and it seemed the velocity of the drop in value had quickened.
Across the world from the US, Japan has doggedly pursued a path of aggressive quantitative easing and extremely dovish economic policies in an attempt to weaken the currency and spark growth. The data flow has been generally choppy as of late, and while the economy is doing better, inflation targets go wildly unmet and trade data is mixed at best.
Japanese Employment Data
One area that has been fairly consistent the employment picture. An already low unemployment rate has continued to notch lower, as we have moved from 3.1 in January to 2.8 in July. A fresh round of unemployment data for August is due Monday night in the US.
The downtrend in unemployment is as much attributable to demographics as economics. The working age population in Japan is shrinking rapidly, and the resulting labor shortage keeps a tight lid on unemployment.
The monthly unemployment rate print has been fairly stable an din line with consensus expecations for the most part.
A neural network predictive model tuned to current conditions and parameters provides guidance for an extension of 2.8% unemployment to continue into this month and into September. This consistent and predictable data should be well received by markets wihtout being market moving given its lack of surprise.
The expection should be for this news, if this scenario holds, to do little to change the structure of the trajectory for the Dollar / Yen pair.
Another pillar of the US financial system, the 10 year T-Bill, has long served as a guidepost for the Dollar/Yen pair. The correlation typically enjoyed by this pair and the 10 year has remained intact, and the percentage of corrlelation has remained around 85%. The level of correlation is in red below, and T-Bill values are in pink, and the candles represent USDJPY price action.
Outlook for the Week
For a binary trader this week, we see a moderate continued strengthening in the Yen versus the US Dollar. Traders should monitor 10 year yields, political news and economic data as it reamins a dynamic environment around this pair. Stable and marginally positive news flow regarding the Japanese economy will be enough to position the currency positively compared to the relative ambiguity coming from the US. With a debt ceiling showdown looming, a cross current of domestic political risk, and uncertainty on interest rates will all be more than enough to hold the Dollar at current levels. We see the potential for the USDJPY pair to remain below 109.50 as having a solid basis and traders could consider positions further below that level. There are elevated probabilities for continued movement below 109.20 in the current environment, with further downside action possible if there is an increase in drama from the US or better than expected data from Japan.