USD/JPY Fundamental Daily Forecast – Flight-to-Safety Traders Driving Japanese Yen Higher

The Dollar/Yen is under pressure shorty before the U.S. opening as investors continue to reaction to a possible escalation of trade wars between the United States and China as well as the European Union. The fact that the Forex pair is trading below last week’s low is a strong indication that investors are starting to price in a worsening of the situation.

At 0913 GMT, the USD/JPY is trading 109.451, down 0.535 or -0.48%.

The key story driving the price action today is coming from The Wall Street Journal. On Sunday evening, The WSJ, citing people familiar with the matter, reported that President Trump plans to bar many Chinese companies from investing in U.S. tech and to block additional technology exports to China.

This news is on top of Trump’s threat on June 18 to impose tariffs on $200 billion worth of Chinese goods at a rate of 10 percent.

China’s Commerce Ministry responded by saying it would take counter measures if the U.S. publishes an additional tariffs list.

Late last week on Friday, Trump threatened to impose a 20 percent tariff on all cars imported from the European Union. The EU said it will have no choice but to retaliate to such a move.

In other news, early Monday, the Bank of Japan released its latest Summary of Opinions. Policymakers said the central bank should “patiently continue” its powerful monetary easing but attention must be paid to the potential side effects of prolonged easy policy. Some board members said the central bank needs to keep monetary easing from severely distorting economic and financial conditions, and to make current policy sustainable.

Overall, it appears that while the BOJ is expected to ride the current economic momentum towards its price target of 2 percent inflation, policymaker opinions have become clearly divided.

Traders are likely to keep this BOJ information on the backburner because at this time, money is flowing into the Japanese Yen because it is a safe haven asset. This is likely to be the theme driving the price action today.

The direction of the USD/JPY is likely to be determined by the direction and price action in U.S. Treasury yields and U.S. equity markets. Falling yields will tighten the spread between U.S. Government Bonds and Japanese Government bonds, making the Japanese Yen a more attractive investment. A sell-off in U.S. equity markets will trigger the carry trade. U.S. investors selling stocks will use the proceeds to pay back Japanese bank loans and in doing so, will have to buyback Japanese Yen.

Finally, investors will get the opportunity to react to U.S. New Home Sales at 1400 GMT. The report is expected to show that 665K units were added. This will be slightly better than the 662K previous read.