USD/JPY Fundamental Daily Forecast – Demand for Risk, Dovish BOJ Comment Boost Dollar/Yen

The Dollar/Yen is also being boosted by a surge in U.S. equity markets shortly before the cash market opening after a report showed growth in China’s services sector had expanded at its fastest rate in three months in August, despite broader economic headwinds.
James Hyerczyk

Increased demand for risk and firmer Treasury yields are helping to underpin the Dollar/Yen on Wednesday. One catalyst behind the move is an easing of tensions in Hong Kong, which is reducing the Japanese Yen’s appeal as a safe-haven asset. This news helped Asian stocks rebound from earlier weakness with Hong Kong’s Hang Seng Index posting a 4% gain.

The Japanese Yen was also pressured after a Bank of Japan board member said the central bank must pre-emptively ease monetary policy to fend off risks to the economy.

At 09:42 GMT, the USD/JPY is trading 106.221, up 0.265 or +0.25%.

On Tuesday, the Dollar/Yen declined after a gauge of U.S. manufacturing from the Institute for Supply Management showed one sector contracted in August, its first decline since 2016. The ISM U.S. manufacturing Purchasing Managers’ Index fell to 49.1% in August, the lowest reading in more than three years. Any reading below 50% signals a contraction.

Traders moved money out of the U.S. Dollar and into the Japanese Yen on Tuesday because the report raised fears of a recession.

Tensions Ease in Hong Kong

Tensions eased in Hong Kong overnight helping to reduce the Japanese Yen’s appeal as a safe-haven asset after shares soared over 4.0% during the Wednesday afternoon session following reports that a controversial extradition bill is set to be withdrawn.

According to the South China Morning Post and other local media reports, Hong Kong leader Carrie Lam will reportedly announce the withdrawal of a contentious extradition bill that has sparked months of mass protests and dampened investor sentiment. Lam is due to make the announcement on Wednesday. CNBC sources confirmed that Lam will be calling for an urgent meeting with pro-Beijing supporters on Wednesday, but the agenda has not been confirmed.

Growth in China’s Services Sector Boosts Demand for Risk

The Dollar/Yen is also being boosted by a surge in U.S. equity markets shortly before the cash market opening after a report showed growth in China’s services sector had expanded at its fastest rate in three months in August, despite broader economic headwinds.

The Caixin/Markit Services Purchasing Managers’ Index (PMI) came in at 52.1 in August, its highest reading since May.

Daily Forecast

Demand for risk and firming U.S. Treasury yields are likely to keep the USD/JPY underpinned on Wednesday. Besides geopolitical issues, the price action is likely to be influenced by U.S. economic data including a report on the U.S. Trade Balance and the Fed’s Beige Book. FOMC Speakers Williams, Bullard and Evans could move the Forex pair if they talk about monetary policy.

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