USD/JPY Fundamental Daily Forecast – More Downside Pressure Likely as Financial Markets Remain Unsettled

The Dollar/Yen is trading higher on Tuesday after posting a sharp sell-off the previous session due the safe-haven buying of the Japanese Yen. The Forex pair is being supported early in today’s session by a technical bounce in global equity markets and slight rise in U.S. Treasury yields. Despite the rebound, traders remain cautious due to contagion fears in the Asia-Pacific region and general uncertainty ahead of the start of the Federal Reserve’s two-day meeting on Tuesday.

At 01:40 GMT, the USD/JPY is trading 109.552, up 0.172 or +0.16%. This is up from Monday’s low at 103.324.

Safe-Haven Buying Drives Demand for Japanese Yen

The USD/JPY retreated on Monday as worries about the fallout from property developer Evergrande’s solvency issues spooked financial markets and lifted safe-haven currencies like the Japanese Yen.

Market sentiment is being rattled by the potential contagion from Evergrande, which is trying to raise funds to pay a host of lenders, suppliers and investors. A deadline for an $83.5 million interest payment on one of its bonds is due on Thursday, and the company has $305 billion in liabilities.

Evergrande’s woes worsened on Monday after warnings from Chinese regulators that the company’s insolvency could fuel broader risks in the country’s financial system if not stabilized.

Fed Meeting on the Radar

Ahead of Monday’s turmoil, the U.S. Dollar had been pushing higher against the Japanese Yen and a basket of other major currencies on expectations the Federal Reserve will begin reducing its monthly bond purchases this year, with the central bank’s policy announcement due on Wednesday.

Daily Forecast

Despite the early strength, the USD/JPY could still face some downside pressure because the financial markets remain unsettled. Some traders are getting their first taste of a classic flight to safety move into the U.S. Dollar and the Japanese Yen until we get some sense of clarity on whether or not Evergrande’s assets will be liquidated in an orderly fashion or just dumped on the open market.

Australia, for example, is facing huge risks because Evergrande is one of the major property owners in the country. Evergrande is expected to be forced to liquidate large amounts of property to fulfil their debt obligations and that will really hurt property and property-related commodities and stocks.

Global debt and equity markets are especially at risk. If they continue to tumble then investors will flock to the Japanese Yen for protection.