USD/JPY Fundamental Daily Forecast – Boosted by Rising Yields, Appetite for Risk

The Dollar/Yen rose in reaction to increased demand for higher risk assets and a rise in U.S. Treasury yields. The divergence between the hawkish Federal Reserve and the dovish Bank of Japan helped make the U.S. Dollar a more attractive investment.

The USD/JPY settled at 110.033, up 0.494 or +0.45%.

Increased demand for risky assets drove the major U.S. stock indexes higher on Monday as investors shrugged off the events at last week-end’s G-7 meeting, instead choosing to focus on the meeting between President Trump and North Korean leader Kim Jong-un.

U.S. Treasury yields rose on Monday as investors moved past the events at the G-7 meeting and on to the CPI data scheduled for Tuesday and Wednesday’s Fed announcements. The yield on the benchmark 10-year Treasury note settled at 2.966, while the yield on the 30-year Treasury bond was higher at 3.108 percent.

Additionally, the Treasury Department auctioned $22 billion in 10-year notes at a high yield of 2.982 percent. The bid-to-cover ratio, an indicator of demand was 2.59. The previous auction came in at 3.00/2.6.

In other news from Japan, Core Machinery Orders came in at 10.1%, crushing the 2.5% estimate and the previous 3.9% figure. Preliminary Machine Tool Orders came in at 14.9%, down from the previously reported 22.0%. M2 Money Stock was 3.2%, below the 3.3% estimate. The previous number was revised down to 3.2%.

Forecast

The Dollar/Yen is trading higher early Tuesday as investors continue to react to expectations for a 25 basis point rate hike by the Fed on Wednesday. Additionally, the Bank of Japan is expected to leave interest rates unchanged at its two-day meeting that ends on Friday.

The widening of the spread between U.S. Government Bond yields and Japanese Government Bond yields is what’s driving the Dollar/Yen higher.

At 0138 GMT, the USD/JPY is trading 110.347, up 0.310 or 0.29%.

U.S. stocks are trading a little better so there is just a hint of appetite for risk. Japan’s Nikkei 225 rose 0.58 percent, but was off a session high touched earlier in the morning as the Japanese currency inched off its intraday low.

Earlier in the session in Japan, the BSI Manufacturing Index came in a disappointing -3.2. Traders were looking for +3.2. Japanese PPI rose 2.7%, beating the 2.1% forecast. Later, the Tertiary Industry Activity report is expected to rise 0.6%.

In the U.S., the key report is May Consumer Price Inflation. It is expected to rise 0.2%. Core CPI is forecast at 0.1%.

Look for the USD/JPY to continue to strengthen as long as U.S. Treasury yields rise. Two factors that could drive yields lower are a major miss to the downside by the CPI, and a disastrous meeting between President Trump and North Korea leader Kim Jong-un.