USD/JPY Fundamental Daily Forecast – Risk Sentiment Driving the Price Action

The Dollar/Yen is drifting lower early Thursday, basically mirroring the price action in the U.S. stock index futures pre-market trade. Risk sentiment is driving the Forex pair this week. Earlier in the week, the Dollar/Yen trended lower amid a steep U.S. stock market sell-off. On Wednesday, the Forex pair recovered to close higher as U.S. equities rebounded. We expect risk sentiment to continue to be the main driven of the direction of the Dollar/Yen on Thursday.

At 07:13 GMT, the USD/JPY is trading 106.088, down 0.098 or -0.09%.

Investors Monitoring Global Equity Markets as Gauge of Risk Sentiment

Global equity market are trading higher on Thursday, but without the guidance of Wall Street’s tech sector as Asia’s investors trod carefully. Although the MSCI, the broadest index of Asia-Pacific shares outside Japan, snapped its longest losing streak since February with a 0.7% gain, and Japan’s Nikkei 225 rose 0.9%, markets in Australia and Hong Kong were just a little better than flat, in a sobering reminder of the risks.

Investors are grappling with whether this month’s U.S. tech sell-off was really over, and beyond that an increasingly uncertain U.S. political outlook and persistent U.S.-China tensions. Uncertainty is driving investors into the Japanese Yen, the traditional safe-haven asset.

Investors aren’t really sure about what drove stocks to take a three-day dive, and what was behind Wednesday’s rally. Investors are going to favor the Yen over the Dollar as long as this uncertainty continues to exist.

Economic Data

Early Wednesday, Japan reported that Preliminary Machine Tool Orders fell 23.3%. This was better than the previously reported -31.3%. On Thursday, another report showed Core Machinery Orders rising 6.3%, beating the 2.0% forecast and reversing the previously reported 7.6% decline.

Although Japan’s core machinery orders rebounded in July from a sharp fall in the previous month, the outlook for capital spending remained uncertain due to fragile global business conditions. After the report, the government maintained its assessment on machinery orders to say they were on a decreasing trend.

Daily Forecast

The direction of the USD/JPY on Thursday will be dictated by risk sentiment. A bullish stock market will encourage investors to sell their safe-haven Japanese Yen positions, driving the U.S. Dollar higher. Another round of steep selling pressure will drive investors into the safety of the U.S. Dollar.

Looking ahead, the world’s third-largest economy is preparing for a new prime minister for the first time in nearly eight years after Shinzo Abe announced his resignation last month due to poor health.

The country’s next leader will face the daunting task of fighting the economic, social and medical fallout from the health crisis while pulling the country out of its worst postwar recession.

Meanwhile, the Bank of Japan will hold its next policy review on September 16-17.

For a look at all of today’s economic events, check out our economic calendar.