Rising U.S. Treasury yields, helped by a somewhat hawkish Fed monetary policy statement and strong U.S. economic data helped drive the Dollar/Yen higher last week. The Japanese Yen was also under pressure after the Bank of Japan increased its buying of medium-term Japanese Government Bonds in a move seen as a warning shot against further rises in bond yields.
The USD/JPY settled at 110.137, up 1.523 or +1.40%.
The 10-year U.S. Treasury yield jumped to a four-year high last week as investors bet on accelerating inflation from this growing economy. The 10-year note was up roughly 4 basis points at 2.837 percent, while the yield on the 30-year Treasury bonds was up roughly 5 basis points at 3.08 percent.
U.S. Federal Reserve Interest Rate Decision and Monetary Policy Statement
The U.S. Federal Reserve ended its two-day meeting on Wednesday by announcing it would not raise its benchmark interest rate. However, it indicated that it expects inflation pressures to heat up as the year moves on.
The decision by the Federal Open Market Committee to leave interest rates at 1.25 to 1.50 percent was widely expected. Additionally, according to projections released in December, FOMC officials expect three rate hikes this year so long as there is no significant disruption to market conditions. Recent price action in the Treasury markets, however, suggests that investors believe the Fed is considering a fourth rate hike.
U.S. Non-Farm Payrolls Report
The U.S. Labor Department reported Friday that the U.S. economy added 200,000 jobs in January, beating economist expectations of 180,000 jobs added. The unemployment rate came in as expected at 4.1%, unchanged from the previous month.
In addition to the robust headline news, yields were driven higher by strong evidence of rising wages. Average hourly earnings posted a 0.3 percent gain for the month and an annualized gain of 2.9 percent, the best gain since the early days of the recovery in 2009.
Forecast
The direction of the USD/JPY this week will be determined by trader reaction to U.S. Treasury yields. Look for the Dollar/Yen to rise if Treasury yields continue to increase since this will widen the spread between U.S. Government Bonds and Japanese Government Bonds, making the U.S. Dollar a more attractive investment.
Gains could be limited if there is a steep sell-off in the equity indexes because there may be a certain point where investors move money into safe haven assets.
There are no major reports out of Japan. In the U.S., the major report is Monday’s ISM Non-Manufacturing PMI. It is expected to come in at 56.5, up from 55.9.