USD/JPY Fundamental Daily Forecast – Carry Trade, Firm Treasury Yields Underpinning Dollar/Yen

The Dollar/Yen is trading flat to lower with the price action being influenced by steady Treasury yields and increased demand for risky assets that is influencing the carry trade. Today’s reaction is a lot different than Friday’s sell-off that was largely influenced by the mixed U.S. Non-Farm Payrolls report and weaker Treasury yields. Also on Friday, investors also showed little reaction to the strong stock market performance.

At 0715 GMT, the USD/JPY is trading 110.450, down 0.035 or -0.03%.

In economic news, Japanese Bank Lending rose 2.2%, better than the 2.0% estimate and previous read. The Current Account also beat the estimate, coming in at 1.85T versus 1.18T. Economy Watchers Sentiment was 48.1, slightly below the 48.2 forecast.

Earlier in the session, the Bank of Japan maintained its upbeat economic assessment for all nine regions of the country and its governor voiced confidence that inflation will head toward his 2 percent target, suggesting that monetary policy will be on hold for the time being.

In its quarterly report on regional conditions, the BoJ said all areas were either recovering or expanding thanks to robust overseas demand, a tightening job market and improving private consumption.

“Japan’s economy is expected to continue expanding moderately,” BoJ Governor Haruhiko Kuroda said in a speech at the quarterly meeting of regional branch managers.

Kuroda also reiterated the BoJ will maintain its ultra-loose policy until inflation hits its 2-percent target.

Forecast

The price action in the USD/JPY today is likely to be influenced by trader reaction to the spread between U.S. Government bond yields and Japanese Government bond yields, and investor demand for risk.

Although investors expressed enough concerns over Friday’s U.S. Non-Farm Payrolls report to drive U.S. Treasury yields lower as well as the USD/JPY, today’s early price action suggests investors may be shrugging off the mixed report.

Rising U.S. Treasury yields should widen the spread between U.S. Government bonds and Japanese government bonds. This should help underpin the USD/JPY. Additionally, increasing demand for risk should help boost the Forex pair because of the carry trade. These are traditional indicators and influences on the market.

If the USD/JPY weakens further then this will tell us there is an unknown outside factor influencing the Forex pair.