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USD/JPY Fundamental Daily Forecast – Steep Plunge in Treasury Yields Fueling Rapid Sell-off

By:
James Hyerczyk
Published: Dec 4, 2018, 05:32 UTC

The rapid plunge in the USD/JPY is primarily being fueled by an inversion in the Treasury yield curve. The USD/JPY is being controlled by the movement in the Treasury yields. If they continue to fall then look for the Dollar/Yen to continue to weaken. Later today, traders will get the opportunity to react to a speech by FOMC Member Williams as well as the IBD/TIPP Economic Optimism report.

USD/JPY

The Dollar/Yen is trading lower early Tuesday. The catalysts behind the selling pressure are a steep drop in U.S. Treasury yields and lower demand for higher-risk assets. U.S. government debt yields also dipped Monday after gaining during the pre-market futures session as investors digested the trade dispute truce brokered between the United States and China.

At 0446 GMT, the USD/JPY is trading 113.152, down 0.500 or -0.44%.

Asian traders initially sold U.S. Treasurys in reaction to the temporary truce reached at the G20 summit in Argentina. However, yields because to fall after Wall Street’s top economists were quick to point out that there were still some fundamental issues that need to be worked out between the world’s largest economies.

Treasury Yield Curve Inverts

The rapid plunge in the USD/JPY is primarily being fueled by an inversion in the Treasury yield curve. The Treasury yield curve is the mathematical line that plots interest rates across maturity dates. Inversion occurs whenever short-term rates exceed long-term rates of equal credit rating and is often heralded as a recession indicator. Although there is a statistical correlation between yield curve inversion and economic downturn, it can take months or years for recession to unfold.

How Did the Inversion Take Place?

The inversion in Treasury yields occurred when the yield on U.S. Treasury bonds with 3-year maturities climbed to 2.838 percent, while yield n U.S. bonds with 5-year maturities dropped to 2.834 percent. Additionally, the closely followed spread between the 2-year Treasury note yield and the 10-year Treasury note yield slipped to 16 basis points, further away from inversion.

Worries Over the Trade Dispute

Over the week-end, U.S. President Trump and China’s Xi Jinping agreed to a 90-day truce from additional tariffs. The agreement indicates a clearly improved tone in US-China relations for the time being, leading to Monday’s initial positive market reaction. However, there are still issues to overcome and not a lot of time to work out the problems. Furthermore, there is still the possibility of higher and broader tariffs if a more permanent agreement isn’t reached by the March 1 deadline.

Forecast

The USD/JPY is being controlled by the movement in the Treasury yields. If they continue to fall then look for the Dollar/Yen to continue to weaken. Later today, traders will get the opportunity to react to a speech by FOMC Member Williams as well as the IBD/TIPP Economic Optimism report.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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