USD/JPY Fundamental Daily Forecast – Pressured by Speculation Fed May Try to Flatten Yield Curve

The Dollar/Yen is trading lower on Tuesday as Japanese Yen investors hammered the resurgent U.S. Dollar for a second consecutive session. The move is being fueled by the notion that the Federal Reserve will take steps to flatten the Treasury yield curve.

At 08:06 GMT, the USD/JPY is trading 107.964, down 0.478 or -0.44%.

According to Reuters, ahead of the Fed’s two-day policy meeting that ends on Wednesday, speculation is growing that the U.S. central bank might adopt yield targets on bonds, or some other measures to anchor long-term yields.

Apparently Fed policymakers have been shaken up by the sudden steepening of the yield curve in recent days due to improving U.S. economic data. Friday’s robust U.S. Non-Farm Payrolls report was one such report that drove a sell-off in U.S. bonds, with 10-year yields rising 28 basis points to 0.959% last week.

Most global investors don’t expect the Fed will try to anchor Treasury yields. In Japan, however, the first major economy to adopt yield-curve-control four years ago, there is more chatter about such a possibility, Reuters reported.

Japanese Investors Heavy Dollar Sellers This Week

Reuters reported that traders said Japanese investors have been heavy sellers of dollars for Japanese Yen this week, positioning for possibly lower U.S. yields.

“Japanese names have been very active since Monday in Dollar/Yen, trying to trade off the chance of some kind of yield-curve control from the Fed,” said Yukio Ishizuki, foreign exchange strategist at Daiwa Securities.

“I personally don’t think yield curve control is necessary now, but the dollar is under clear selling pressure.”

Yield Spread Trading Has Moved to Forefront

After trading mostly sideways for nearly a month, the USD/JPY broke out to the upside last week, hitting its highest level since March 26. It was its best weekly performance in more than two months, as spreads between U.S. and Japanese yields widened.

This is a sign that the yield is becoming the main trading factor for Dollar/Yen, said Junichi Ishikawa, senior foreign exchange strategist at IG Securities.

Economic News

On Monday, Japan reported mostly positive news. Economy Watchers Sentiment rose 15.5, up from 7.9 and better than the estimate. Average Cash Earnings fell 0.6%, once again beating the forecast, but coming in lower than the previous report. M2 Money Stock rose 5.1%.

There was only one report on Tuesday. Preliminary Machine Tool Orders fell 52.8%, worse than the previously reported -48.3%.

Daily Forecast

Looking ahead to Wednesday’s Fed announcements, if the Fed does not take action, traders expect the dollar will continue its run into the upper end of the trading range.

Keep an eye on the yield curve and the spread between U.S. and Japanese Bond yields. This should spur the next move in the Dollar/Yen. A shift up in U.S. yields could support a Dollar/Yen breakout above 109.

For a look at all of today’s economic events, check out our economic calendar.