USD/JPY Fundamental Daily Forecast – Falling US Government Bond Yields Pressuring Prices

The Dollar/Yen is inching higher on Thursday after selling off the previous session as investors continue to juggle the two safe-haven assets. Yesterday’s weakness may have been part of overall weakness in the U.S. Dollar as other currencies also gained against the greenback.

Some days the dollar rallies against the Japanese Yen when stocks break and other days the move is reversed. On Wednesday, a high ranking government official just about killed any chance of a pre-election stimulus package. Last week, this news would’ve sent the U.S. Dollar higher, but yesterday, investors favored the Japanese Yen for protection.

At 06:45 GMT, the USD/JPY is trading 105.311, up 0.159 or +0.15%.

World Stocks Weaken on Pandemic Surge, Yen Gains on Safety Bid

Global stock markets mostly retreated on Wednesday as a record number of new coronavirus infections in parts of Europe led investors to shift away from risky assets to traditional safe havens such as the Japanese Yen.

Concerns that a resurgence in the COVID-19 pandemic could lead governments to again shut down economies spurred profit-taking, particularly after the recent stock market rally.

Pandemic uncertainties were compounded by news on Tuesday of halts to separate trials for a COVID-19 vaccine and a treatment, tempering a brief stock boost from U.S. investment bank Goldman Sachs Group’s strong earnings report, Reuters reported.

Remarks on Wednesday by U.S. Treasury Secretary Steven Mnuchin that a deal for more fiscal stimulus would not likely be reached before the November 3 elections also capped gains in shares.

“At this point getting something done before the election and executing on that would be difficult, just given where we are and the level of detail, but we’re going to try to continue to work through these issues,” Mnuchin said at  conference sponsored by the Milken Institute.

Next Dollar/Yen Move May Be Determined by Direction of Yields

On Wednesday, government bonds also benefited from investor caution. German bund yields, which move inversely to prices, hit their lowest since May. The 10-year U.S. Treasury yield dipped to 0.7256%, and the yield curve – the gap between two – and 10-year yields – flattened a touch on news that more U.S. fiscal stimulus was unlikely before the November 3 election.

When U.S. rates were well above Japanese yields, a drop in U.S. Government bond yields had a more significant influence on the USD/JPY. However, with U.S. yields so low, the affect isn’t that great on the Forex pair. Nonetheless, a possible inversion of the U.S. yield curve would be a significant event that could drive the USD/JPY sharply lower. It’s certainly something that has to be monitored.

Daily Forecast

Our work suggests the bias is to the downside for the USD/JPY, but we may have to put up with a few days of choppy trading because of technical support levels. However, crossing to the weak side of 105.056 then the recent bottom at 104.944 will indicate the selling is getting stronger. Our trigger point for an acceleration to the downside is 104.807. We’ll get a little nervous about the short side if buyers overcome 105.624.

For a look at all of today’s economic events, check out our economic calendar.