USD/JPY Fundamental Daily Forecast – PBOC Statement Encourages Profit-Taking

The Dollar/Yen continued to ease after Tuesday’s technically bearish reversal top. The daily trend is still up, but the Forex pair has lost nearly half of the momentum that drove it to highest level since June 21 earlier in the week.

At 0745 GMT, the USD/JPY is trading 110.431, down 0.147 or -0.13%.

U.S. banks are closed for Independence Day so there is very little professional resistance to the selling pressure. At the same time, major buyers are also scare so essentially, there may be no one in the market supporting the dollar. With volume at extremely low levels, big orders from small traders can bully the market in any direction they want.

Outside of the Dollar/Yen realm, the Chinese yuan recovered from 11-month lows after authorities took steps on Tuesday to calm financial markets rattled by trade wars. Short-term this may be relieving tensions enough to encourage Dollar/Yen buyers to reduce safe-haven trades. Long-term, it may be setting up the next buying opportunity at more favorable prices because the move by the People’s Bank of China is not likely to change overall investor fears over an escalating trade dispute.

According to reports, the USD/JPY reversed course on Tuesday after reassuring remarks from Yi Gang, Governor of the PBOC. At the time of his comment, the yuan was trading 6.7204 per dollar, its weakest level since early August.

According to Bloomberg, Governor Yi said in a statement on the PBOC website that the central bank was closely watching foreign exchange fluctuations and would seek to keep the yuan at a stable and reasonable level. Cross-border capital flows were under control, he noted.

Some speculators were saying that the PBOC had intervened in the market and this may have triggered the reversal in the USD/JPY. None-the-less, it doesn’t change the outlook for a potential trade war. If you look at the other markets, stocks fell and money flowed into the safe-haven Treasurys. Because of these moves, we expect buyers to return to the USD/JPY after a short-term correction.

After the U.S. holiday, traders will get the opportunity to react to the minutes from the Federal Reserve’s June meeting on Thursday and Friday’s U.S. Non-Farm Payrolls report on Friday.

Investors will be looking for validation of policymakers’ forecasts for two more rate hikes this year. If the data supports the Fed’s assessment then look for the USD/JPY to resume the rally.

Basically, the news about the PBOC is just short-term noise in a rally that is being primarily driven by a widening divergence in the monetary policies of the hawkish U.S. Federal Reserve and the dovish Bank of Japan.