USD/JPY Fundamental Daily Forecast – Rebounds After China Supports Yuan

The Dollar/Yen is trading higher on Tuesday after posting a wicked reversal to the upside in response to a rebound in the Chinese Yuan. Traders are saying the offshore Yuan pulled back from an all-time low after Beijing appeared to take steps to prevent the currency from weakening further. The move is in response to a steep drop in China’s currency that prompted the U.S. government to declare the country was manipulating its currency.

At 08:23 GMT, the USD/JPY is trading 106.411, up 0.463 or +0.44%.

There was economic data from Japan, but most of the price action has been generated by the movement in the Yuan.

In Japan, Average Cash Earnings rose 0.4%, beating the -0.8% forecast. Household Spending jumped 2.7%, higher than the 1.3% forecast. Japan’s leading indicators were up 93.3%, slightly below the 93.6% estimate. The 30-year auction generated a yield of 0.29%, lower than the previous 0.36 percent.

Focus Remains on Yuan and U.S.-China Relations

On Monday, China allowed its onshore Yuan break through the key 7 per dollar level for the first time since the global financial crisis. This drove global equity markets sharply lower as well as fixed-income yields, sending investors into the safe-haven Japanese Yen.

China also said it would not buy any U.S. agricultural products. Both moves were seen as signs that China was not preparing to end the U.S.-China trade dispute anytime soon and may be actually digging in for a prolonged trade dispute.

Late Monday, U.S. Treasury Secretary Steven Mnuchin said in a statement the government had determined that China is manipulating its currency and that Washington would engage with the International Monetary Fund to eliminate unfair competition from Beijing.

Daily Forecast

The rapid turnaround in the USD/JPY on Tuesday is directly related to the recovery in the Chinese Yuan. The Japanese Yen and the Yuan will continue this relationship throughout the session. The market forces seem to want the Yuan lower, but China is said to be selling Yuan-denominated bills in Hong Kong, in a move seen as curtailing short selling of its currency.

“The recovery in Yuan and the move in the Yen is triggered by the fixing, which has eased some concern about competitive currency devaluation,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities in Tokyo. “China is not really trying to dramatically weaken its currency. However, nothing has been resolved in the trade war.”

In U.S. economic news on Tuesday, the JOLTS Job Openings report is expected to show 7.34 million new jobs, just about even with last month’s report. IBD/TIPP Economic Optimism is expected to come in at 54.6.

Additionally, traders will get the opportunity to react to speeches from FOMC Member Evans and FOMC Member Bullard. Both are likely to say that given the current events and the volatility in the markets, another 25-basis point rate cut in September is likely warranted.