USD/JPY Fundamental Daily Forecast – NAFTA Deal Supporting Increased Demand for Risky Assets

The Dollar/Yen is inching higher early Monday, continuing last week’s rally that was fueled by a quarter point rate hike by the U.S. Federal Reserve, expectations of further rate hikes by the central bank and a bullish outlook for the U.S. economy.

What it all comes down to is the widening interest differential between U.S. Government bonds and Japanese Government bonds. This is being fueled by the divergence in the monetary policies of the hawkish U.S. Federal Reserve and the dovish Bank of Japan.

For example, just a couple of days after the Fed made its move, the BOJ Summary of Opinions showed that policymakers were still debating how to stimulate the economy.

In other news, earlier today in Japan, the Tankan Manufacturing Index came in at 19, below the 22 forecast. The Tankan Non-Manufacturing index was 22, below the 23 forecast. Final Manufacturing PMI was 52.5, also missing the 52.9 forecast.

The key quarterly Tankan surveys by the BOJ showed that sentiment among large manufacturers dipped last month as worries grew about global trade tensions. Furthermore, there may be a trend developing because today’s data market the third straight quarter of decline.

The service sector survey fell in part due to string of natural disasters this summer including massive flooding caused by torrential rain in western Japan and Typhoon Jebi in early September.

Forecast

At 0614 GMT, the USD/JPY is trading 113.929, up 0.256 or +0.22%. This puts the Forex pair on the strong side of the December 12, 2017 top at 113.745. If the technical momentum continues then buyers may make a run at the November 6, 2017 top at 114.728.

In addition to a hawkish outlook for U.S. interest rates, the Dollar/Yen is also being supported by increased demand for higher-risk assets. The major U.S. stock indexes are trading higher early Monday as the U.S. and Canada announced that they had reached a deal to replace the North American Free Trade Agreement (NAFTA).

The Japanese Yen tends to weaken during periods of increased demand for stocks because of the carry trade. Investors take cheap loans from Japanese banks and convert Yen into Dollars to invest in U.S. stock markets.

Later today, investors will get the opportunity to react to a slew of U.S. economic data including Final Manufacturing PMI, Construction Spending and Total Vehicle Sales. The major report is the ISM Manufacturing PMI. It is expected to come in at 60.1, slightly below the previously reported 61.3.

Federal Open Market Committee Member Bostic is also scheduled to speak.