USD/JPY Fundamental Daily Forecast – Appetite for Risk Supportive, Gains Limited by Plunging Yields

The Dollar/Yen is consolidating for a second day on Tuesday inside a major technical retracement zone. On Monday, the market edged slightly higher after failing to follow-through to the downside after last week’s steep sell-off. Investors showed little response to another plunge in U.S. Treasury yields, which suggests they may have been using the U.S. Dollar as a safe-haven investment. Furthermore, the stock market’s recovery from early session weakness may have also underpinned the greenback.

At 03:18 GMT, the USD/JPY is trading 110.045, up 0.081 or +0.08%.

The price action in the USD/JPY is being primarily driven by the movement in U.S. Treasury yields and appetite for risk.

Treasury Market

The yield curve inverted during Monday’s session, however, this had little impact on the movement of the USD/JPY. The move was fueled by fixed-income investors who continued to worry about global growth and a potential deceleration in the U.S. economy.

The yield on the benchmark 10-year Treasury note fell to its lowest level since December 2017, hitting 2.388 percent. The yield on the 2-year Treasury note was also lower at 2.233 percent while the 3-month yield was at 2.454 percent. International fixed-income rates were also down with the German 10-year bund as well as the Japanese 10-year trading in negative territory Monday.

Stock Market

The major U.S. equity markets finished mixed on Monday, well off their intraday lows. The blue chip Dow Jones Industrial Average finished higher, while the benchmark S&P 500 Index and the tech-based NASDAQ closed lower. Nonetheless, the intraday rebound served as a sign of increasing demand for risk. This weighed on the Yen appeal as a safe-haven assets.

Daily Forecast

Based on Monday’s price action and the early action on Tuesday, it looks as if USD/JPY investors have absorbed the plunge in U.S. Treasury yields. It further indicates the next major move in the Forex pair will likely be determined by appetite for risk. Another steep sell-off is likely to pressure the Dollar/Yen and firmer equity prices will be supportive.

Earlier in the session, the Bank of Japan released its latest Summary of Opinions. The report showed that Bank of Japan policymakers debated the feasibility of ramping up monetary policy stimulus at their rate review this month as heightening overseas risks weighed on the country’s fragile economy.

While most policymakers maintained their view Japan’s economy continued to expand moderately, some voiced concern over the impact of slowing global demand and the potential hit to consumption from a scheduled sales tax hike in October.

“In the current situation where downside risks are materializing, the BOJ should be prepared to make policy responses,” one of the central bank’s nine board members were quoted as saying.

“If there are concerns that the inflation momentum will be lost, the BOJ should ease policy decisively,” the member said.

Another member said the BOJ must act “pre-emptively” if economic and price developments deteriorate, the summary showed. Others, were more cautious, maintaining the current policy was the best approach given the rising cost of prolonged easing, according to the summary.

“In a situation where a virtually zero lower bound exists, there is a possibility the effect of monetary policy easing via an additional decrease in government bond yields will be limited than before,” one board member said.

Finally, one member was quoted as saying in the summary, “There’s concern Japan may face growing signs of sliding into recession, depending on the impact of overseas economic developments and the scheduled domestic sales tax hike.”