USD/JPY Fundamental Daily Forecast – Renewed Demand for Risk Generating Early Support

A slight comeback by U.S. stock futures and higher U.S. Treasury yields is helping to boost the Dollar/Yen early Tuesday. After early session weakness, the Forex pair is clawing back more than 50% of yesterday’s losses. If the upside momentum continues we could see a test of yesterday’s high at 1.14210, which is slightly below the October 3 top at 114.580 and the November 6, 2017 main top at 114.728.

At 0747 GMT, the USD/JPY is trading 114.010, up 0.170 or +0.15%.

The Dollar/Yen rally to 114.210 on Monday and its subsequent break into 113.575 earlier today represents a small ongoing-battle between investors who believe the Fed’s hawkish policy is making the dollar an attractive asset and those who believe the Japanese Yen is the more attractive asset during periods of extreme stock market weakness.

After a sell-off from October 3 to October 26, the USD/JPY has mounted a strong rally, recovering nearly all of the loss from 114.580 to 111.375. The rally has been fueled by a combination of increased demand for higher risk assets, a hawkish U.S. Federal Reserve and a dovish Bank of Japan.

Two weeks ago, the BOJ confirmed it will maintain its ultra-loose monetary policy. Last week, the Fed strongly suggested it would raise rates again in December. In other words, the divergence between the monetary policies of the hawkish Fed and the dovish BOJ should continue to make the U.S. Dollar a more attractive asset. To put it another way, the widening spread between the U.S. Government bond yields and Japanese Government bond yields is drawing investors into the U.S. Dollar.

If this trend continues then look for buyers to make a run at 114.728 over the short-run.

Standing in the way of a breakout to the upside is the stock market volatility. Stock market weakness and volatility tends to drive investors into the Japanese Yen for protection. This may not be enough to derail the bullish trend or turn the trend to down, but it is enough to slow down the rally and generate short-term selling pressure.

Forecast

There are no major reports from the U.S. or Japan on Tuesday so the direction of the USD/JPY is likely to be determined by investor demand for risk. The longer-term uptrend is being controlled by the interest rate differential. The short-term trend is being manipulated by the stock market. Therefore, we have to conclude that the Dollar/Yen will rally today if the stock market recovers from yesterday’s sell-off. If stocks reverse today’s early strength then look for the USD/JPY to retest today’s earlier lows or beyond.