USD/JPY Fundamental Daily Forecast – Investors Dump Dollar, Buy Yen as They Bet Big on New Stimulus

The Dollar/Yen is extending its losses late Wednesday, hitting its lowest level since September 21 after U.S. President Donald Trump boosted hopes for a large fiscal stimulus package, prompting some investors to move money into riskier currencies. The news also dampened the U.S. Dollar’s appeal as a safe-haven asset.

At 20:17 GMT, the USD/JPY is trading 104.562, down 0.7610 or -0.72%.

The price action suggests investors are betting heavily that there may be a stimulus package by this weekend, while ignoring signs of opposition from Trump’s Republican Party.

Senate Majority Leader Mitch McConnell provided no timetable for considering a relief bill and privately told his fellow Republicans he did not favor a deal before the November 3 presidential and congressional elections, a senior Senate Republican aide told Reuters.

In other news, U.S. Treasury yields held near their highest levels in four months on Wednesday on expectations a deal can be reached. The benchmark 10-year U.S. Treasury yield was around 1.5 basis points higher on the day at 0.82%, having touched fresh four-month highs of 0.84%.

Fed Beige Book Highlights Uncertainty Amid Uneven Recovery as Some Struggle

The U.S. economy continued to grow across the country as it recovered from the coronavirus pandemic but the picture was uneven, according to a new report from the Federal Reserve, Bloomberg reported.

“Changes in activity varied greatly by sector,” the central bank said in its Beige Book survey released Wednesday in Washington. “Economic activity continued to increase across all districts, with the pace of growth characterized as slight to modest in most districts.”

The report was based on information collected by the Fed’s 12 regional banks through October 9.

“Districts characterized the outlooks of contacts as generally optimistic or positive, but with a considerable degree of uncertainty,” the Beige Book noted. All told, the word “uncertainty” appeared 20 times in the report.

“With the pandemic ongoing and the stimulus ended, uncertainty remained extremely high in anticipation of layoffs, foreclosures, and bankruptcies,” the Philadelphia Fed reported. The Boston Fed called uncertainty “the watchword.”

Short-Term Outlook

The bets are in and it looks like investors are banking on a stimulus package. This would come at a great time if the Fed’s assessment of the economy is correct. The data presented by the Fed clearly shows that fiscal stimulus is badly needed to keep the economy afloat, with spending and unemployment at risk.

Wednesday’s sell-off is huge, but we will see an even bigger reversal to the upside if policymakers fail to make a deal, or if the new stimulus package falls short of investor expectations.