USD/JPY Fundamental Daily Forecast – Ripe for Technically-Driven Short-Covering, but Heightened Volatility Likely to Cap Gains

The Dollar/Yen is trading nearly flat on Friday after yesterday’s plunge drove the Forex pair into its lowest level since September 7. The greenback was pressured by year-end position-squaring, a steep drop in U.S. Treasury yields, a sell-off in equities and a threat of a U.S. government shutdown. Traders may be taking a breather today as the pressure on Treasury yields is easing early in the session.

At 0755 GMT, the USD/JPY is trading 111.310, up 0.022 or +0.01%.

Traders are saying the steep drop in the U.S. Dollar was unexpected especially since the U.S. Federal Reserve raised its benchmark interest rate and signaled an outlook that was less dovish than traders had anticipated. Some are saying the liquidation of heavy long positions in the dollar may have been fueled by year-end position squaring and thin holiday markets.

The Japanese Yen likely benefited from the steep drop in U.S. Treasury yields. Investors bought T-notes and T-bonds due to rising risks to global growth, the steep drop in equity prices and the plunge in oil prices which sent a strong disinflationary message to investors. Falling yields also helped make the U.S. Dollar a less-desirable investment.

The plunge in stock markets fed risk aversion with the VIX, a gauge of market fear, surging to 30. This drove investors into the safety of the lower-yielding Japanese Yen.

Forecast

Although the USD/JPY may be ripe for a technically-driven short-covering rally, the heightened volatility in the markets which tends to make the Japanese Yen a highly desirable asset is not expected to go away.

Furthermore, the USD/JPY could garner support if U.S. Treasury yields can find a floor. But with conditions expected to thin due to Tuesday’s Christmas holiday, we may continue to see whipsaw-like trading conditions.

Additionally, lingering concerns over U.S.-China trade relations continue to be a burden for investors. The dollar could also feel added pressure on the news that U.S. President Donald Trump is prepared to shut down the government after midnight on Friday.