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Strong US Sales, Consumer Confidence to Validate USD/JPY Breakout

Strong US Sales, Consumer Confidence to Validate USD/JPY Breakout

David Song, Strategist

Fundamental Forecast for Yen: Neutral

Positive data prints coming out of the world’s largest economy may heighten the appeal of the greenback and prop up USD/JPY in the week ahead as the Federal Reserve remains on course to normalize monetary policy in 2015.

Even though U.S. Non-Farm Payrolls was just shy of market expectations, the ongoing prints above 200K may reinforce the Fed’s forecast for a stronger recovery, and we may see a growing number of central bank officials show a greater willingness for a September liftoff should the fundamental developments coming out of the real economy highlight an improved outlook for growth and inflation. Indeed, a rebound in Retail Sales paired with an uptick in the U. of Michigan may boost interest rate expectations, and growing speculation for a September liftoff may generate fresh monthly highs in the dollar-yen as it breaks out of the tight range carried over from July.

However, the bearish sentiment surrounding the Japanese Yen may continue to unravel as we’re seeing a growing dissent within the Bank of Japan (BoJ), with board member Takahide Kiuchi voting against the majority to lower the monetary base target to JPY 45T from the current JPY 80T. As a result, the narrowing risk for a further expansion of the BoJ’s asset-purchase program may keep USD/JPY within a broad range ahead of the Fed’s first rate hike as market participants weigh the outlook for monetary policy.

With USD/JPY snapping back from a fresh weekly of 125.06, the lack of following-through behind the NFP reaction raises the risk for a larger pullback, and the exchange rate may face a further consolidation in the days ahead should we see another mixed batch of data prints coming out of the U.S. economy. On the other hand, key developments pointing to a stronger recovery may put the dollar-yen on a more bullish course and may spur a test of 2015 highs (125.84) as the Fed keeps the door open for a September liftoff. - DS

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