USD/JPY Fundamental Daily Forecast – Appetite for Risk Controlling the Price Action

Mixed trading action in the Asian stock markets and U.S. equity futures markets are helping to limit gains and pressure the Dollar/Yen early Wednesday. Slightly weaker U.S. Treasury yields are also helping the Forex pair give back some of yesterday’s gains.

At 0538 GMT, the USD/JPY is trading 109.922, down 0.099 or -0.09%.

On Tuesday, traders made a technical adjustment in the market after trading sideways to lower since June 15. There weren’t any significant changes in the fundamentals which suggests the technical reversal was fueled by profit-taking and short-covering in reaction to oversold conditions.

Despite the rally, investor concerns over deteriorating trade conditions between the United States and China continue to drive the price action. Essentially, the short-term catalyst driving the Dollar/Yen lower is weakening demand for higher risk assets. This event is encouraging investors to park money in U.S. Treasury bonds, consequently pushing yields lower, while making the Japanese Yen a more attractive investment.

Furthermore, weakening U.S. stock prices are activating the carry trade by forcing U.S. investors to pay back loans from Japanese banks. In doing so, they have to sell U.S. Dollars and buy Japanese Yen.

In other news, the S&P/Case-Shiller 20-City Composite Home Price Index rose 5.4 percent in February, just below expectations for a 5.5 percent increase among analysts.

The U.S. Richmond Fed manufacturing index rose another 4 points to 20 in June after jumping 19 points to 16 in May. It came in at 11 a year ago.

Consumer confidence fell well below economists’ expectations in June, fueled by a bleak outlook for U.S. economic conditions. The Confidence Board’s index dropped to 126.4 from a revised 128.8 in May. The index was expected to hit 128.1.

On Tuesday, Atlanta Federal Reserve bank president Raphael Bostic said that intensifying trade tensions over the last week have raised the risks to the U.S. economy. He further added that he may rule out a fourth rate increase for the year if the developing trade war gets worse.

“The more it progresses in this more contentious way, the more it leads me to feel the risks are on the downside for the broader economy,” Bostic said. “If this progresses the way it has been the last couple of days there is some likelihood I will be moving away from four as a real possibility.”

Additionally, Dallas Fed Bank President Robert Kaplan said he believes the U.S. central bank’s monetary policy is still accommodative and suggested the Fed could raise rates at least two more times before it stops being accommodative. However, Federal Open Market Committee member Raphael Bostic said he may rule out a fourth rate hike this year if trade issues start to negatively affect the economy.

Forecast

While the primary focus for Dollar/Yen traders on Wednesday is expected to be appetite for risk and the direction of U.S. Treasury yields, there are several U.S. economic reports that could also contribute to the price action.

U.S. Core Durable Goods Orders are expected to come in at 0.5%, down from the previously reported 0.9%. Durable Goods Orders are expected to show a 0.9% decline, better than the previously reported 1.6% decline.

The Goods Trade Balance is forecast at -68.9 Billion versus the previously revised higher -67.3 Billion. Preliminary Wholesale Inventories are estimated at 0.2%, better than the previously revised lower 0.1%.

Pending Home Sales are expected to show a 0.4% increase. Federal Open Market Committee member Randal Quarles is also expected to speak at 1500 GMT. He could move the markets if he comments on the impact of the trade war on the U.S. economy and the Fed’s future rate hike plans.