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USD/JPY Fundamental Daily Forecast – Profit-Taking, Position-Squaring Hitting Dollar/Yen

Earlier in the day, the Bank of Japan left its benchmark interest rate and policy unchanged as expected. BOJ Governor Haruhiko Kuroda on Wednesday stressed that he would not pull the plug on monetary easing until inflation hits his 2 percent target, warning that escalating international trade disputes would inflict widespread damage to global growth.
James Hyerczyk
USDJPY
USD/JPY

The Dollar/Yen is trading lower on Wednesday despite a surge in U.S. Treasury yields and increased demand for higher risk assets. This suggests profit-taking and position-squaring is behind the move. Although the Bank of Japan released its interest rate decision and monetary policy statement earlier in the session, it revealed nothing unexpected.

At 1832 GMT, the USD/JPY is trading 112.229, down 0.094 or -0.08%.

The yield on the two-year Treasury note rose to its 2008 highs Wednesday while the 10-year Treasury note continued to strengthen over 3 percent.

The yield on the benchmark 10-year Treasury note was higher at 3.076 percent, while the yield on the 30-year Treasury bond was up at 3.227 percent. Rising yields tend to make the Dollar/Yen stronger because they widen the interest rate differential between U.S. Government bonds and Japanese Government bonds, making the U.S. Dollar a more attractive investment.

Rising yields are also making bank stocks a more attractive investment. A strong performance in the Financials sector is helping to boost the S&P 500 Index and Dow Jones Industrial Average. Increased demand for risky assets also tends to drive up the Dollar/Yen.

Earlier in the day, the Bank of Japan left its benchmark interest rate and policy unchanged as expected. BOJ Governor Haruhiko Kuroda on Wednesday stressed that he would not pull the plug on monetary easing until inflation hits his 2 percent target, warning that escalating international trade disputes would inflict widespread damage to global growth.

The BoJ maintained its short-term interest rate target at minus 0.1 percent and a pledge to guide 10-year government bond yields around zero percent.

The central bank also left unchanged a new forward guidance, adopted in July, that pledges to keep interest rates extremely low for an extended period.

“Japan’s economy is expanding moderately,” the BoJ said in a statement announcing the policy decision.

The last time the central bank made a major change to policy was in July. With soft inflation forcing it to maintain its massive stimulus longer than expected, the BoJ took measures in July to make its policy framework sustainable such as allowing bond yields to move more flexibly around its target.

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