The Dollar/Yen is trading lower on Tuesday in reaction to a drop in U.S. Treasury yields and lower demand for risky assets. This comes just one day after the Forex pair jumped to its highest level since December 27 on the back of higher Treasury yields. Yesterday, it was the hope of a trade deal between the United States and China driving the price action. Today, it’s the lack of clarity over the details of any deal to end the trade dispute, driving prices lower.
At 08:23 GMT, the USD/JPY is trading 110.828, down 0.232 or -0.22%.
Traders are also paring long positions in preparation for today’s Treasury auctions, economic data and testimony from Federal Reserve Chairman Jerome Powell.
On Monday, U.S. Treasury yields ticked higher as investors kept an eye on trade negotiations between the U.S. and China. This helped widen the spread between U.S. Government bonds and Japanese Government bonds, making the U.S. Dollar a more attractive investment. Furthermore, this drove up demand for risk, which dampened the appeal of the safe-haven Japanese Yen.
The catalyst behind the optimistic outlook toward trade was a Tweet by President Trump, citing “substantial progress” in bilateral talks between the world’s two largest economies, including intellectual property protection and technology transfer issues. As a result, the President said he would delay the implementation of new tariffs on Chinese goods, scheduled to start around March 1. Traders were also reacting positively to the news that Trump and Chinese President Xi Jinping may be meeting in late March to perhaps close a trade deal.
Daily Forecast
Some of today’s selling is being fueled by investors casting doubts on whether the developments were significant enough to expect a new trade deal sooner than previously expected. Traders began to raise concerns over what the final trade agreement would look like. Questions were raised about whether the U.S. would keep current tariffs in place, gradually reduce them, or eliminate them all at once.
Traders also appear to be squaring positions ahead of Fed Chair Powell’s testimony before Congress. Investors will be looking for clues on the Fed’s next moves during Powell’s appearance, when he will provide prepared remarks followed by question-and-answer sessions.
They’ll be looking for: an acknowledgement of the challenges balance sheet reduction poses, and the economic outlook in view of renewed chatter from Fed policymakers about the weak pace of inflation amid a global economic slowdown.
Traders will also get the opportunity to react to a report on housing starts and building permits for December at 13:30 GMT. At 15:00 GMT, the Richmond Manufacturing Index and a report on consumer confidence will be released.
Finally, a U.S. Treasury auction of $26 billion in 52-week bills and $32 billion in 7-year notes could influence Treasury yields, which could drive the price action in the Dollar/Yen.
Look for the USD/JPY to rally if Powell is perceived as hawkish. The Forex pair is likely to weaken if Powell maintains his dovish tone.