USD/JPY Fundamental Daily Forecast – Pressured by Safe-Haven Demand for Japanese Yen

U.S. stocks fell on Wednesday and closed near their session lows after the Wall Street Journal reported that progress on a trade deal with China are stalled over restrictions on Huawei, citing people familiar with the talks.
James Hyerczyk
Dollar/Yen and USD/JPY

The Dollar/Yen weakened on Wednesday in reaction to a drop in U.S. Treasury yields and expectations of a rate cut by the U.S. Federal Reserve at the end of the month. The Forex pair was also pressured by uncertainties surrounding whether the White House would embark on efforts to weaken the dollar in the wake of comments from U.S. President Donald Trump.

Weaker-than-expected U.S. housing data also weighed on the U.S. Dollar, while a late session break in U.S. equity markets drove up demand for the safe-haven Japanese Yen.

On Wednesday, the USD/JPY settled at 107.943, down 0.290 or -0.27%.

US Treasury Yields Fall on Housing News

U.S. Treasury yields fell on Wednesday following the release of the weaker-than-expected housing data. At the close, the yield on the benchmark 10-year Treasury note was lower at around 2.052%, while the yield on the 2-year Treasury note yielded 1.82%.

The drop in Treasury yields made the U.S. Dollar a less-attractive investment.

At the end of the session, traders were pricing in a 100% chance of a 25-basis point rate hike by the Fed when it meets on July 30-31, and about a 25% chance of a more-aggressive 50-basis point rate hike.

Trump Creates Tension

Demand for safe-haven U.S. Treasurys also increased in reaction to comments from President Donald Trump on Tuesday. Trump raised doubts on the trade progress between China and the U.S. and renewed threats to slap tariffs on another $325 billion of Chinese goods.

Dollar Support Crumbles after US Housing Starts Fall; Housing Permits Hit 2-Year Low

Data released by the U.S. government on Wednesday showed homebuilding fell for a second straight month in June and permits dropped to a two-year low, suggesting the housing market continued to struggle despite lower mortgage rates.

The U.S. Commerce Department said housing starts decreased 0.9% to a seasonally adjusted annual rate of 1.253 million units last month as a rebound in the construction of single-family housing units was offset by a plunge in multi-family homebuilding.

Data for May was revised slightly down to show homebuilding falling to a pace of 1.265 million units, instead of slipping to a rate of 1.269 million units as previous reported. Economists were looking for housing starts to come in at 1.261 million units in June.

Building permits tumbled 6.1% to a rate of 1.220 million units in June, the lowest level since May 2017. Traders were pricing in 1.30 million units.

Weaker US Equities Drive Safe-Haven Demand for Yen

U.S. stocks fell on Wednesday and closed near their session lows after the Wall Street Journal reported that progress on a trade deal with China are stalled over restrictions on Huawei, citing people familiar with the talks.

Daily Forecast

Treasury yields and safe-haven demand will drive the price action in the USD/JPY on Thursday. Early in today’s session at 01:49 GMT, the Forex pair is trading 107.734, -0.210 or -0.19%. The catalyst behind the early weakness is lower U.S. equity prices, which are driving up demand for the safe-haven Japanese Yen.

In other news, Japan’s Trade Balance came in at -0.01T, better than the -0.14T forecast.

In the U.S. on Thursday, investors will get the opportunity to react to the Philadelphia Fed Manufacturing Index, Weekly Unemployment Claims and the Conference Board Leading Index. In the afternoon, FOMC Member John Williams will speak.

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