USD/JPY Fundamental Daily Forecast – Is Yen Being Supported By Renewed Fears Over North Korea?

The Dollar/Yen is trading lower on Wednesday after spiking to its highest level since February 2 the previous session. The rally was driven by a surge in U.S. Treasury yields. Today’s selling pressure is likely being fueled by profit-taking and position-squaring in reaction to flight to safety buying in the Japanese Yen. Traders could also be keying in on a slew of U.S. economic data that is due to be released later today.

At 1122 GMT, the USD/JPY is trading 110.144, down 0.214 or -0.19%.

On Tuesday, the U.S. Dollar was supported by gains in long-term U.S. Treasury yields. The dollar rally, which stalled last week after weaker-than-expected April U.S. inflation data, was lifted on Tuesday when strong U.S. retail sales sent 10-year Treasury yields surging to a seven-year peak of 3.095 percent.

The Japanese Yen may be getting a boost from safe haven buying after North Korea cancelled high-level talks with Seoul, denouncing military exercises between South Korea and the United States, which may have thrown into question next month’s unprecedented summit between Kim Jong Un and U.S. President Donald Trump.

In other news, Japan’s economy contracted more than expected at the start of this year, breaking the longest run of growth seen for decades, in a blow to Prime Minister Shinzo Abe’s reflationary ‘Abenomics’ policies.

The Japanese economy shrank by 0.6 percent on an annualized basis, a much more severe contraction than the median estimate for an annualized 0.2 percent. Fourth quarter growth was revised to an annualized 0.6 percent, down from the 1.6 percent estimated earlier.

Wednesday’s data marked the end to eight straight quarters of economic expansion, which was the longest sequence of growth since a 12-quarter run between April-June 1986 and January-March 1989 during the asset-inflated bubble economy.

Forecast

The Japanese Yen barely budged after data showed Japan’s economy contracted for the first time in nine quarters during January-March. So today’s price action is either related to lower U.S. Treasury yields ahead of the U.S. economic reports or flight-to-safety buying due to geopolitical concerns.

If geopolitical concerns over North Korea become the issue today then flight to safety buying could drive down Treasury yields and the USD/JPY.