Dollar Yen : A Peek Ahead

  • US Initial Jobless Claims and GDP data improve.
  • 10-year Treasury rates dip on Thursday then recover.
  • USD/JPY returns to 12-month high on Friday.
  • FXStreet forecast Poll sees 110.00 in the immediate future

USD/JPY continued its consolidation in the early part of the week staying below 109.25 resistance, but Thursday's finish just below this level set the stage for an easy traverse on Friday and a straight run to the 12-month high.

American Treasury rates and improved US data were the main source of dollar strength.

The massive support the Bank of Japan (BOJ) is providing to equity prices may be having the opposite effect on perception, undermining what little confidence exists in the Japanese economy.Two factors are driving US rates higher

Economic growth in the US is expected to accelerate this year. The Fed's March Projection Materials increased the 2021 GDP estimate to 6.5% GDP from September's 4.2%.

Inflation is also headed for a rapid gain with the Fed's favorite gauge, the Core Personal Consumption Expenditure (PCE) Price index, rising to 2.2% from 1.8% and the headline rate reaching 2.4% from 1.8% by the end of this year.

In his Congressional testimony, Chairman Powell repeated the Fed contention that the inflation increases are temporary due to the base effects from last year's pandemic collapse in prices.

Inflation concerns have been exacerbated by the $3 trillion in stimulus spending from Washington in the past four months. 

With the latest $1,400 payment hitting consumer bank accounts this month, another burst of spending comparable to the 7.6% jump in Retail Sales in January could be in order. If that consumption encounters lingering supply shortages from the pandemic lockdown, it would add to the upward pressure on prices.

A final point of bond market worry is the Fed's new inflation averaging policy which will permit prices to range above the 2% target for an undetermined amount of time.

Japanese economic data provided no timely information aside from March prices in the capitol, which fell on the year in the headline but rose slightly in the core rate.

The contrast between the expectant US economy and its reflection in Treasury rates and stagnant Japan has been and remains the currency pair’s story. The 6.9% climb in the USD/JPY this year is, excepting the pandemic panic in March, the steepest since the 14.7% jump from 103.02 on November 3, 2016 to 118.21 that December 18.

If the US economy performs as forecast, Treasury rates could move substantially higher. With the BOJ committed to its dead-end and seemingly permanent zero rate policy, which inhibits Japan's economic recovery rather than helping it, the yen will stay on the defensive for the immediate future.

The area above 110.00 was heavily traded from late 2016 until the middle of 2019 and the lower levels will present many opportunities for profit-taking.

As long as the rate divergence between the US and Japan continues to widen, the USD/JPY will rise.