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USD/JPY Fundamental Weekly Forecast – US Treasury, JGB Interest Rate Differential Dictating Direction

James Hyerczyk
·3 min read

The Dollar/Yen closed higher last week, but the gains were skewed by last Monday’s huge rally in reaction to the news that Pfizer had developed a COVID-19 vaccine with 90% efficiency. After that initial thrust, the Forex pair spent most of the week trading sideways to lower.

The dollar headed for its best week against the Japanese Yen since March as COVID-19 vaccine news lured investors out of the Japanese safe haven, though riskier currencies have made little headway as the pandemic worsens in Europe and the United States.

Last week, the USD/JPY settled at 104.616, up 1.246 or +1.21%.

After the initial thrust to the upside, virus worries helped the Japanese Yen recoup a little of its losses. In Europe and the United States, a second wave of infections has prompted the re-imposition of restrictions to stop the virus’ spread.

Central Bankers Issue Warnings

Central bank bosses late last week also warned that the crisis has some way to run, even with the end now in sight thanks to Pfizer’s announcement this week that trials have showed the vaccine it developed with Germany’s BioNTech seems to work.

“From a huge river of uncertainty, we see the other side now,” said European Central Bank President Christine Lagarde in a panel discussion with U.S. Federal Reserve Chair Jerome Powell and Bank of England Governor Andrew Bailey.

“But I don’t want to be exuberant about this vaccination because there is still uncertainty,” she said, about its production and distribution.

The Fed’s Powell urged Congress to pass another stimulus package as the country continues to grapple with the impact of the coronavirus pandemic.

On Thursday, Powell said that even as the economy starts to recover, he’s worried about certain long-term effects the pandemic may have.

Specifically, Powell said the economy will likely be more technology focused than before and could leave retail, factory and hospitality workers who lost their jobs out of work for longer than they otherwise would be.

“We’ve got new cases at a record level,” Powell stated. “We’ve seen a number of states begin to reimpose limited activity restrictions and people may lose confidence that it’s safe to go out.”

This came as Congress remains stuck in a stalemate in terms of striking a deal on a new stimulus bill, limiting the chances one will be passed before the end of the year.

Weekly Forecast

Treasury yields essentially dictated the direction of the USD/JPY last week. The Dollar/Yen rose sharply when yields surged in reaction to the vaccine news on Monday as investors bet on the economy moving back to pre-pandemic levels sooner than expected.

The USD/JPY retreated late in the week as U.S. Treasury yields fell as spiking COVID-19 infections raised the probability of a new round of economic shutdowns, and investors grappled with the realization that any potential vaccine remains months away from coming to market.

We expect the same reaction this week. You can try to trade the coronavirus headlines, but it’s better to track the movement in the Treasury yields.

Rising yields widen the spread between U.S. Government bond yields and Japanese Government bond (JGB) yields, making the U.S. Dollar a more attractive assets. Falling yields tighten the interest rate differential between U.S. Treasuries and JGB’s, increasing demand for the Japanese Yen.

For a look at all of today’s economic events, check out our economic calendar.

This article was originally posted on FX Empire