The Dollar/Yen had a strong week, driven higher by rising expectations for a third interest rate hike by the U.S. Federal Reserve before the end of the year. The catalysts behind the move were hawkish comments from Fed Chair Janet Yellen, relatively strong economic data and increased demand for higher risk assets like stocks.
The USD/JPY settled at 112.456, up 0.476 or +0.43%.
Economic data suggested the Japanese economy was improving, but not enough to change monetary policy.
The highlight of the day on week was a speech by Fed Chair Janet Yellen. She essentially said that the Fed may have overstated the labor market’s strength and rate of inflation, indicating future monetary policy will be more accommodative than previously thought.
Yellen also said the case for a gradual pace of adjustment is strengthened in the face of “significant uncertainties.” She also said the Fed should be “wary of moving too gradually” especially since “persistently easy monetary policy” might have “adverse implications for financial stability.”
Fed Chair Janet Yellen emphasized that the Federal Reserve needs to continue to continue gradual rate hikes despite broad uncertainty about the path of inflation. Finally, she added it “would be imprudent to keep monetary policy on hold until inflation is back to 2 percent.”
The chances for a Fed rate hike before the end of the year jumped to 76 percent after Yellen’s speech before settling at 71 percent on Friday. Before the September 20 Fed meeting, the chances for a rate hike hovered about 48 percent.
Last week, the U.S. reported strong Durable Goods and Final GDP beat the estimate. There were still some lingering concerns over U.S. housing and consumer spending. Some Fed members also expressed doubts over the next Fed rate hike due to low inflation.
In Japan, Japanese Prime Minister Shinzo Abe called for a snap election, telling voters only he could protect them from the threat of North Korean missiles. Mr. Abe also told a crowd in Tokyo’s busy Shibuya district that only his party could implement appropriate measures to deal with Japan’s rapidly ageing and declining population.
The Bank of Japan’s Summary of Opinions showed most members of the nine-member board said it was appropriate to maintain the current stimulus program given it would take time to achieve the BOJ’s 2 percent inflation target. However, one BOJ policymaker called for expanding monetary stimulus.
The U.S. will dominate the economic news this week with data on the ISM Manufacturing PMI and the ISM Non-Manufacturing PMI. Fed Chair Janet Yellen also speaks on Wednesday. She could shake up the markets like she did last week if she continues to push her hawkish message.
The highlight of the week is the U.S. Non-Farm Payrolls report. The Non-Farm Employment Change is expected to be relatively low at 88K. However, investors should pay close attention to the Average Hourly Earnings number. It is expected to jump from 0.1% to 0.3%. It is also an indicator of inflation so a stronger number will move the Fed closer to hitting its inflation objective and justify a December rate hike.
U.S. Treasury yields and demand for higher risk assets should continue to dictate the direction of the USD/JPY this week. North Korea, however, continues to be the wildcard that could send investors into safe haven assets.