USD/JPY Fundamental Daily Forecast – Price Action Driven by Appetite for Risk, Treasury Yields

The Dollar/Yen is trading nearly flat on Thursday as investors continue to assess investor demand for risk amid concerns over U.S.-China trade relations, forecasts for a global economic slowdown, worries over the on-going U.S. government shutdown, Brexit concerns and slowing growth in Japan and the Euro Zone. Volatility in the Forex pair has come to a crawl although there has been a slight bias to the upside since January 3. This has been driven by the more than 50% recovery in U.S. equity markets after a steep drop since October.

At 0813 GMT, the USD/JPY is trading 109.603, up 0.048 or +0.04%.

As far as the markets are concerned, the primary focus for investors is on Treasury yields and equities. Rising Treasury yields will make the U.S. Dollar a more attractive investment because of the lower Japanese Government bond yields. Stock market gains will support the Dollar because of the carry trade.

If stocks break sharply then money will flow into the safe-haven Treasurys. This will put pressure on yields. Falling yields will make the dollar a less-desirable asset, while helping to increase demand for the Japanese Yen.

Dollar/Yen traders are keeping an eye on news from earlier in the week regarding global growth concerns. However, U.S.-China trade tensions are probably the most dominant force driving investor sentiment at this time.

Appetite for risky assets has waned since Monday when the International Monetary Fund (IMF) cut its 2019 and 2020 global growth forecasts, citing a bigger-than-expected slowdown in China and the Euro Zone, and the failure to resolve U.S.-China trade tensions in a timely manner.

Additionally, the week began with China announcing that its official economic growth came in at 6.6 percent in 2018, the slowest pace since 1990. The number was widely expected, but it represented a noticeable decline from the revised 6.8 percent reported in 2017.

Furthermore, investors are worried about the outcome of Brexit after Prime Minister Theresa May’s divorce deal with the EU was rejected by lawmakers last week in the biggest defeat in modern British history.

Later today, traders will be focusing on the European Central Bank’s monetary policy announcement, where it is widely expected to keep policy unchanged.

All of these events drive appetite for risk and this drives the price action in the USD/JPY.

In other news, early Wednesday, the Bank of Japan kept interest rates on hold but lowered its inflation expectations for the 2019 fiscal year. Because Japanese rates will remain low, the Japanese Yen will continue to be used as a safe-haven asset.