USD/JPY Fundamental Daily Forecast – Higher Yields Supportive, Trade War Fears Limiting Upside

The USD/JPY is trading slightly lower early Monday after straddling Friday’s close earlier in the session. The price action in the Forex pair and U.S. equity markets today makes me wonder if there are actually concerns over U.S. trade relations which some of the headlines are suggesting today.

At 0808 GMT, the USD/JPY is trading 109.483, down 0.038 or -0.04%.

If there were major concerns over U.S. trade relations, I’m quite confident there would be lower demand for risky assets and more demand for safe haven investments like the Yen. We could see it later in the session, however. This is one factor that will drive the price action today.

The other factor will be U.S. Treasury yields. At this time, September U.S. 10-year U.S. Treasury notes and U.S. 30-year Treasury notes are trading lower. Since they move inversely to yields, this means yields are trading higher.

Forecast

Let’s just say the USD/JPY is trading sideways early Monday because of uncertainty over potential political risks. However, investors don’t feel the event is enough of a worry to overtake Friday’s upbeat U.S. jobs report.

Friday’s closely watched jobs report showed growth in the U.S. labor market picking up speed and wages rising in May, increasing the chances of a rate hike by the Federal Reserve in June to a near certainty and increasing expectations of a fourth hike later this year.

Basically, the USD/JPY is being underpinned today by firm Treasury yields. They are being supported by Friday’s solid jobs report. However, gains are being limited by a potential flare up in trade tensions between the United States and its allies.

The jobs report is supporting the traditional fundamentals, but risk aversion fears is limiting gains. These so-called headline worries include a potential trade war and uncertainty over the U.S.-North Korea summit on June 12.

So we’re going to forecast a steady market today unless Treasury yields make a volatile move. Rising Treasury yields should underpin the USD/JPY. Falling yields should pressure the Forex pair. The size of the moves will be determined by the volatility in the Treasury markets.