USD/JPY Fundamental Daily Forecast – Pressured by Low Demand for Risk

“Risk-off” investor sentiment is helping to pressure the Dollar/Yen early Friday. Weary investors are reacting to lower U.S. Treasury yields and weak global equity markets. The catalysts behind the moves are emerging market debt concerns, the approaching end of massive amounts of liquidity from central banks and escalating tension ahead of this week-end’s G-7 conference.

At 0649 GMT, the USD/JPY is trading 109.525, down 0.175 or -0.15%.

U.S. Treasury yields plunged on Thursday as investors moved funds into safe-haven assets amid growing concerns over emerging market risk. Traders were also taking protection ahead of this weekend’s G-7 meeting, and next week’s key monetary policy meetings.

The yield on the benchmark 10-year Treasury note fell to 2.939 percent, while the yield on the 30-year Treasury bond dropped to 3.089.

Global investors are watching debt levels in emerging markets like Brazil. There is some talk that banks are concerned about overexposure to Brazil, leading some speculative hedge funds to short the dollar in an effort to trim exposure in the country’s volatile currency.

In the U.S. on Thursday, Weekly Unemployment Claims came in better-than-expected at 222K. Traders were looking for 223K. The IBD/TIPP Economic Optimism report came in at 53.9, lower than the 54.2 estimate but higher than the previous read. Consumer Credit fell to 9.3B, lower than the 13.9B forecast. The previous month was revised higher to 12.3B.

The reports had little effect on the markets with most traders focused on trade issues heading into this weekend’s G-7 meeting. Traders are also waiting for the widely anticipated meeting between President Trump and North Korea President Kim Jong-un.

In Japan early Friday, minor reports included Bank Lending, Current Account, Final GDP Price Index and Final GDP. All of the reports underperformed.

Final GDP came in down 0.2%, worse than the 0.1% estimate, but unchanged from the preliminary report. Looming uncertainties suggest that Prime Minister Shinzo Abe’s program to reflate the economy, known as “Abenomics,” is losing momentum and could force policymakers to ponder additional measures to keep the recovery going.

Despite the negative economic news, USD/JPY traders are focused on risk issues at this time. Risk sentiment will drive the price action today. Simply stated, the Dollar/Yen will rise if investors demand risky assets, and the Forex pair will continue to decline if they shun risk. If they didn’t like risk on Thursday then I don’t think they are going to like risk on Friday going into the trade meeting.