USD/JPY Fundamental Daily Forecast – Direction Dictated by Demand for Risk, Treasury Yields

The Dollar/Yen is down late Monday after gapping lower on the opening. However, the Forex pair is rebounding from its earlier low as traders await more details on the status of the coronavirus outbreak in China.

The Dollar/Yen has essentially been tracking the price action in the U.S. equity markets and Treasurys all session. The reaction to the stock market is because of the carry trade, while the reaction to Treasurys is being fueled by the interest rate differential between U.S. Government bonds and Japanese Government bonds.

At 18:46 GMT, the USD/JPY is trading 109.115, down 0.274 or -0.25%.

Stock Market Influence

The major U.S. equity indexes plunged early Monday after more cases of the coronavirus were confirmed over the weekend, ratcheting up worries over the virus’ impact on the world economy.

“China is the biggest driver of global growth so this couldn’t have started in a worse place,” said Alec Young, managing director of global markets research at FTSE Russell. “Markets hate uncertainty, and the coronavirus is the ultimate uncertainty in that no one knows how badly it will impact the global economy.”

10-year Treasury Yield Falls to Lowest Since October

The benchmark 10-year Treasury yield hit its lowest level in more than three months as investors grew increasingly concerned about the economic impact of the fast-spreading coronavirus.

The yield on the 10-year Treasury note, which moves inversely to price, was lower at around 1.609%, while the yield on the 30-year Treasury bond was also lower at around 2.058%. The 10-year Treasury yield touched a low of 1.603% in the session, its lowest level since October 10.

U.S. Economic Data

Data out Monday also didn’t help with the market sentiment. New home sales fell unexpectedly in December, down 0.4% from the prior month to a seasonally adjusted annual rate of 694,000 units, the Commerce Department reported Monday.

Daily Forecast

The USD/JPY is likely to continue to be influenced by trader demand for risky assets and the direction of Treasury yields. In other words, stock market weakness and falling Treasury yields are likely to pressure the USD/JPY.

With no end in sight to the crisis, rallies by USD/JPY are likely to be sold.