Japanese Yen Likely to Hit Further Lows Unless Key Data Disappoints

Fundamental Forecast for JPY: Bearish

• Sharp words from US Treasury Secretary sends Japanese Yen higher
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The Japanese Yen fell for the fourth-consecutive week against the US Dollar and matched its longest losing streak since the USD/JPY traded above ¥121 through late 2014. Sharp rallies in the US S&P 500 and broader ‘risk’ helped push the JPY lower, but equity markets will be put to the test in what could be a big week ahead for global financial markets.

It perhaps should have been a good week for the Yen as strong talk from US Treasury Secretary Jack Lew initially sent the JPY notably higher. Those gains were erased just a day later, however, and the sharp reversal suggests momentum and trader interest remains firmly in the direction of Yen weakness (USD/JPY gains). Indeed, recent CFTC Commitment of Traders data showed the largest single-week shift towards JPY-selling since it broke down to decade-plus lows (USD/JPY highs) in May, 2015.

A holiday-shortened trading week and an effectively empty economic calendar for Japan will focus our attention on a flurry of US economic data releases through the first days of June. And whether the USD/JPY continues onto its fifth-consecutive weekly advanced will likely depend on results from key US inflation numbers due Tuesday as well as the strongly market-moving US Nonfarm Payrolls report on Friday.

The key question is straightforward: will the US Federal Reserve raise interest rates for only the second time in 10 years at their June 15 meeting? Current interest rate pricing shows an approximate 35 percent likelihood of a 25bps rate hike—up substantially from a less than 5 percent chance shown just two weeks ago. It is perhaps unsurprising to note the interest-rate-sensitive USD/JPY exchange rate has rallied noticeably as odds have improved for a Fed hike. And we expect that any strong positive surprises in inflation and labor data could only help Fed expectations—moving the USD/JPY in kind.

The weight of expectations is high, and there remains ample room for disappointment. Yet it would take a fairly significant shift in market conditions to break the US Dollar’s winning streak versus the Japanese Yen.