USD/JPY Fundamental Daily Forecast – Safe-Haven Demand for Yen Hinges Upon US Stock Market Performance

The Dollar/Yen is trading flat early Tuesday amid rising fears of a global recession. Traders are mulling over mixed signals with Treasury yields dipping the previous session and the U.S. Dollar rising.

Although weak economic data out of China drove investors to seek shelter in the traditional safe-haven U.S. Treasurys and the U.S. Dollar. Demand for the safe-haven Japanese Yen was subdued on Monday.

This may be because investors may not feel comfortable taking a position ahead of Wednesday’s U.S. Retail Sales report and release of minutes from the last Fed meeting, which could offer clues as to the Fed’s commitment to aggressive rate hikes.

At 02:40 GMT, the USD/JPY is trading 133.344, up 0.0033 or +0.02%. On Monday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $70.18, up $0.09 or +0.13%.

It’s All about the Safe-Havens

Safe-haven buyers bought the Japanese Yen early Monday after the release of a new batch of disappointing data from China bolstered global recession worries, but the market gave back most of those early gains because of a stronger U.S. stock market.

The price action in the U.S. stock market suggests investors may have already discounted a “mild” recession. Nonetheless, investors hedged their positions in U.S. Treasurys and the U.S. Dollar.

If economic conditions deteriorate enough to trigger sharp break in global equity markets then I believe investors will aggressively move money into the Japanese Yen. Until then, look for a tight trading range as traders will continue to monitor the divergence between market rate hike expectations and the Fed’s rate hike expectations.

Early Tuesday, the probability of a 50-basis-point has risen to 66.0% and the probability of a 75-basis-point rate hike has fallen to 34.0%.

This reflects the impact of China’s weak data on the U.S. economy. What it indicates is that if China slips into recession, the U.S. is sure to follow. The market thinks that this concern will encourage the Fed to pull back on a supersized rate hike.

Daily Forecast

The early price action suggests that USD/JPY investors may have already priced in a 50-basis-point rate hike by the Fed in September.

Today’s reports on building permits, housing starts, capacity utilization and industrial production could confirm that notion if they come in weaker than expected. This would put pressure on the Dollar/Yen.

If the data were to meet or exceed expectations then the Dollar/Yen could rise since this would give the Fed the support it needs to continue its aggressive rate hikes.

A weaker U.S. stock market could also drive up demand for the Japanese Yen.