USD/JPY Fundamental Daily Forecast – Keep an Eye on 3-Month/10-Year Treasury Spread

Sellers have been hitting the U.S. Dollar since November 28 after Federal Reserve Chairman Jerome Powell said that U.S. interest rates were nearing neutral levels. Traders started adjusting their Dollar/Yen positions as they interpreted his remarks as signaling a slowdown in the pace of rate hikes.
James Hyerczyk
USD/JPY
USD/JPY

The Dollar/Yen is trading higher on Wednesday, clawing back some of its losses from the previous session, when it posted its biggest one-day drop since July 20. During Tuesday’s session, the Forex pair was torched by aggressive safe-haven buying of the Japanese Yen. Although a rally in the Yen is often associated with flight-to-safety buying during times of political and financial turmoil, yesterday’s move was more of a reaction to an inverted Treasury market.

At 0818 GMT, the USD/JPY is trading 113.046, up 0.263 or +0.22%.

An inversion in part of the Treasury yield curve raises concerns about a potential slowdown in the U.S. economy. Nervous investors were drawn into the Japanese yen over an inversion of the yield curve between three-year and five-year U.S. Treasury notes and between two-year and five-year notes which made the U.S. Dollar a less-attractive investment.

Although the yield curve had been tightening for some time, the inversion came as a surprise since these were the first parts of the Treasury yield curve to invert since the financial crisis, excluding very short-term debt.

Treasury experts are saying that in the initial phase of the inversion of the yield curve, investors are worried about whether there’ll be a recession. The early move often leads to aggressive selling of the U.S. Dollar. Traders also tend to overreact more to weak data than to strong data during this phase of the process.

Forecast

Sellers have been hitting the U.S. Dollar since November 28 after Federal Reserve Chairman Jerome Powell said that U.S. interest rates were nearing neutral levels. Traders started adjusting their Dollar/Yen positions as they interpreted his remarks as signaling a slowdown in the pace of rate hikes.

The Treasury markets are closed on Wednesday so we may see some counter-trend trading in the USD/JPY as investors book profits after yesterday’s steep sell-off. When they return on Thursday, investors will be watching the spread between the three-month Treasury bills and 10-year Treasury notes since there is proof that an inversion between these two financial instruments precedes a recession. As of Tuesday’s close, the spread was down to 50 basis points, its tightest range in 12 years.

Don't miss a thing!

Discover what's moving the markets. Sign up for a daily update delivered to your inbox

Latest Articles

See All

Expand Your Knowledge

See All

Top Promotions

Top Brokers

IMPORTANT DISCLAIMERS
The content provided on the website includes general news and publications, our personal analysis and opinions, and contents provided by third parties, which are intended for educational and research purposes only. It does not constitute, and should not be read as, any recommendation or advice to take any action whatsoever, including to make any investment or buy any product. When making any financial decision, you should perform your own due diligence checks, apply your own discretion and consult your competent advisors. The content of the website is not personally directed to you, and we does not take into account your financial situation or needs.The information contained in this website is not necessarily provided in real-time nor is it necessarily accurate. Prices provided herein may be provided by market makers and not by exchanges.Any trading or other financial decision you make shall be at your full responsibility, and you must not rely on any information provided through the website. FX Empire does not provide any warranty regarding any of the information contained in the website, and shall bear no responsibility for any trading losses you might incur as a result of using any information contained in the website.The website may include advertisements and other promotional contents, and FX Empire may receive compensation from third parties in connection with the content. FX Empire does not endorse any third party or recommends using any third party's services, and does not assume responsibility for your use of any such third party's website or services.FX Empire and its employees, officers, subsidiaries and associates, are not liable nor shall they be held liable for any loss or damage resulting from your use of the website or reliance on the information provided on this website.
RISK DISCLAIMER
This website includes information about cryptocurrencies, contracts for difference (CFDs) and other financial instruments, and about brokers, exchanges and other entities trading in such instruments. Both cryptocurrencies and CFDs are complex instruments and come with a high risk of losing money. You should carefully consider whether you understand how these instruments work and whether you can afford to take the high risk of losing your money.FX Empire encourages you to perform your own research before making any investment decision, and to avoid investing in any financial instrument which you do not fully understand how it works and what are the risks involved.
FOLLOW US