USD/JPY Fundamental Daily Forecast -Needs Higher Yields, Demand for Risk to Sustain Rally

Increased demand for risky assets and higher U.S. Treasury yields helped drive the Dollar/Yen higher on Wednesday. Stocks were supported by an easing of geopolitical tensions. Yields were boosted news that the European Central Bank may be planning to end its stimulus program.

Rising demand for stocks helped drive the carry trade which means investors borrowed in Yen to invest in U.S. Dollar denominated markets. Rising interest rates helped widen the spread between U.S. government bond yields and Japanese government bond yields, making the U.S. Dollar a more attractive investment.

The USD/JPY settled at 110.187, up 0.387 or +0.35%.

U.S. Treasury instruments rose on Wednesday after the European Central Bank’s chief economist said the bank is set to discuss the end of its massive bond-buying program.

The threat of less accommodative monetary policy in Europe, in turn, helped spur a sell-off in American debt, driving yields higher since they move in opposite directions.

The major U.S. stock indexes surged on Wednesday with the blue chip and benchmark indexes driven higher by a strong performance in bank stocks which rose in reaction to rising U.S. interest rates.

Additionally, the news was positive across the board on Wednesday with solid performances in reports on Revised Nonfarm Productivity, Revised Unit Labor Costs and the Trade Balance.

U.S. worker productivity increased less than initially thought in the first quarter. The Labor Department said on Wednesday nonfarm productivity, which measures hourly output per worker, rose at a 0.4 percent annualized rate in the January-March quarter, instead of the 0.7 percent pace it reported last month.

Growth in revised unit labor costs rose 2.9% versus an estimate of 2.7%. This supported views that inflation pressures were steadily building up.

The U.S. trade deficit fell to a seven-month low in April as exports rose to a record high, lifted by an increase in shipments of industrial materials and soybeans. The Commerce Department said on Wednesday the trade gap dropped 2.1 percent to $46.2 billion, the smallest since September.

Forecast

The Dollar/Yen is trading a little lower early Thursday as investors await key U.S. economic reports later today. Investors could also be lightening up on the long side as they prepare for this week-end’s G-7 meeting, which could escalate trade tensions, or could resolve key issues.

At 0708 GMT, the USD/JPY is trading 110.004, down 0.184 or -0.18%.

The direction of the USD/JPY will be primarily driven by yields and demand for risk. Key U.S. economic data includes Weekly Unemployment Claims and IBD/TIPP Economic Optimism.

Weekly Unemployment Claims are expected to come in at 223K, slightly higher than last week’s 221K. IBD/TIPP Economic Optimism is expected to rise slightly to 54.2 from 53.6.