USD/JPY Fundamental Daily Forecast – Early Signs of ‘Risk-Off’ Sentiment Weighing on Dollar/Yen

The Dollar/Yen is trading lower on Wednesday after posting a potentially bearish technical chart pattern the previous session. Since yesterday’s rally stopped just short of the November 6, 2017 top at 114.728, the price action suggests that profit-taking is taking place after a 12 day rally.

At 07:02 GMT, the USD/JPY is trading 114.011, down 0.325 or -0.28%.

Bullish Factors:  Widening Interest Rate Differential, Carrytrade

Helping to drive the Dollar/Yen higher has been rising U.S. Treasury yields. The move has widened the interest rate differential which has made the U.S. Dollar a more attractive asset versus the Japanese Yen.

On Wednesday, the 10-year U.S. Treasury yield hovered above 1.6%, its highest point since mid-May, as strong corporate earnings boosted economic sentiment.

This trend is likely to continue over the long-run because the Federal Reserve is closer to tightening monetary policy while the Bank of Japan is still considering more stimulus. Furthermore, inflation is soaring in the United States and below the mandate in Japan. Just two reasons why the USD/JPY should remain underpinned.

Increased demand for riskier assets has also helped drive the Dollar/Yen higher because of the carry trade. With demand for stocks rising, traders are borrowing at extremely low rates in Japan, selling the Yen and buying the dollar to invest in U.S. equities.

Also on Wednesday, the benchmark S&P 500 Index saw its sixth straight day of gains, amid the upbeat earnings reports.

Daily Forecast

A technical closing price reversal bottom in December 10-year Treasury notes on Wednesday is an early sign that interest rates could dip lower over the next 2 to 3 days.

Meanwhile, a technical closing price reversal top in the USD/JPY is a sign that profit-taking could lead to a 2 to 3 day correction of the current rally.

Since the move in the USD/JPY mirrored the chart pattern in Treasury futures, we can clearly see that the direction of yields is controlling the movement in the Dollar/Yen.

We’re also seeing early weakness in the U.S. stock market likely in reaction to the news that China Evergrande shares briefly dropped more than 10% in the opening trade on Thursday, after a deal to sell some of its assets to Hopson Development Holdings fell through.

Right now were looking at the possibility of a “risk-off” day which could put pressure on the USD/JPY throughout the session on Thursday.