USD/JPY Fundamental Daily Forecast – Lower US Yields Pressuring Dollar/Yen

The Dollar/Yen is trading lower on Tuesday but inside yesterday’s range and Friday’s extremely wide range as investors continue to digest the impact of Prime Minister Abe’s sudden resignation last Friday, while assessing the Federal Reserve’s new policy to keep interest rates at or near historically low levels for several years. The inside move suggests investor indecision and impending volatility.

At 07:14 GMT, the USD/JPY is trading 105.717, down 0.187 or -0.18%.

Japan’s Suga to Run in LDP Leadership Race – Reuters

Chief Cabinet Secretary Yoshihide Suga has indicated he intends to run for leadership of Japan’s ruling party, a source said on Monday, soon after a report emerged that he had won the backing of one of the party’s most powerful factions, according to Reuters.

The leader of the Liberal Democratic Party (LDP) will almost certainly become prime minister because of its majority in the lower house of parliament, replacing Shinzo Abe who on Friday said he was stepping down for health reasons.

Suga has not announced his candidacy for leader but has indicated privately that he intends to run, said the person, who declined to be identified because the information is not public.

Earlier, Kyodo news reported that a group of legislators led by Deputy Prime Minister Taro Aso would back Suga in the race, giving him critical support that adds to some recent momentum.

In the Japanese stock market, investors are putting their money on Suga taking over as Japan’s next prime minister, and extending the economic policies that defined his predecessor’s nearly eight years in office.

Fed’s Clarida Says Rates Won’t Rise Just Because Unemployment Falls

Perhaps keeping a lid on the USD/JPY were somewhat dovish comments from the Fed’s Vice Chairman Richard Clarida. On Monday, Clarida said the Federal Reserve will not raise interest rates just because the unemployment rate is falling.

In a wide-ranging speech that addressed a major policy shift in Fed thinking, Clarida also said he and his fellow officials do not see negative interest rates as a viable option now and doubt the effectiveness of yield curve controls, though that could change.

He also acknowledged that policy may have gone astray in the past by following models that were not effective in a world where lower interest rates will be the norm.

“My colleagues and I believe that this new framework represents a critical and robust evolution of our monetary policy strategy that will best equip the Federal Reserve to achieve our dual-mandate objectives on a sustained basis in the world in which we conduct policy today and for the foreseeable future,” Clarida said in prepared remarks for a speech to the Peterson Institute for International Economics.

Short-Term Outlook

Expectations of lower U.S. rates is helping to keep a lid on the USD/JPY, while the news that Chief Cabinet Secretary Yoshihide Suga has indicated he intends to run for leadership of Japan’s ruling party, is providing support.

Lower U.S. rates will tighten the spread between U.S. Government bond yields and Japanese Government bond yields, making the U.S. Dollar a less-attractive investment. Meanwhile, if elected, Suga is expected to support the economic moves from PM Abe, which includes ultra-low interest rates from the Bank of Japan. This could help keep a lid on the Japanese Yen.

Adding it all up suggests a rangebound trade unless traders decide to dump the U.S. Dollar for other economic reasons.

For a look at all of today’s economic events, check out our economic calendar.