USD/JPY Fundamental Daily Forecast – Safe-Haven Appeal, Higher Yields Make Dollar Attractive Asset

Tensions over the timing and extent of a trade deal is likely to continue to underpin the USD/JPY on Tuesday. To some extent, traders are also expressing concerns over another potential partial government shutdown at midnight on Friday although there is some talk that a deal has been reached to avoid the shutdown.
James Hyerczyk
USD/JPY

The Dollar/Yen is trading higher on Tuesday, moving to its highest level since December 28 after breaking out of a week-long trading range. The rally was fueled by a surge in U.S. Treasury yields, which made the U.S. Dollar a more attractive asset. Buyers also responded to the resilient U.S. stock market which continued to suggest underlying demand for higher risk assets.

At 06:58 GMT, the USD/JPY is trading 110.531, up 0.147 or +0.13%.

Thin volume due to a bank holiday in Japan may have contributed to Monday’s spike to the upside, but traders are saying the catalyst behind the move was likely safe-haven buying tied to U.S.-China trade relations and global growth worries.

As far as U.S.-China trade relations are concerned, investors are seeking the safety of the dollar over the Japanese Yen because the two economic powerhouses are reportedly far from making a deal. The Wall Street Journal reported on Friday that there isn’t even a preliminary draft in place from the first two rounds of trade negotiations.

Furthermore concerns are being raised because the Trump administration is expected to continue to keep pressing China on long-standing demands that it make sweeping structural reforms to protect American companies’ intellectual property, to end policies aimed at forcing the transfer of technology to Chinese companies, and curb industrial subsidies.

The biggest worry for investors is that the U.S. and China will not reach a trade deal before a March 1 deadline and that the U.S. will increase the tariffs on $200 billion worth of Chinese imports from 10 percent to 25 percent.

In other news out of Japan, the Tertiary Industry Activity report came in at -0.3%, better than the previous report, but lower than the -0.1% forecast. The decline was its third in four months. Preliminary Machine Tool Orders came in at -18.8%, a bigger loss than the previously reported -18.3%.

Forecast

Tensions over the timing and extent of a trade deal is likely to continue to underpin the USD/JPY on Tuesday. To some extent, traders are also expressing concerns over another potential partial government shutdown at midnight on Friday although there is some talk that a deal has been reached to avoid the shutdown.

Essentially, the key factor driving the dollar higher is value. Although there is safe-haven appeal, the dollar is still the best value in the world because of the interest rate differential. Additionally, with all major central banks preventing dovish outlooks for their respective economies, the greenback remains the most attractive currency.

On Tuesday, higher demand for risky assets and rising Treasury yields are likely to continue to drive the USD/JPY higher.

In the U.S. on Tuesday, investors will get the opportunity to react to the latest JOLTS Job Openings report. It is expected to come in at 6.84M, slightly below the previously reported 6.89M.

Fed Chair Jerome Powell also delivers a speech at 17:45 GMT. He could move the USD/JPY if he discusses monetary policy.

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