USD/JPY Fundamental Daily Forecast – Stimulus Concerns Encouraging Profit-Taking

The Dollar/Yen is inching higher on Thursday after posting a steep loss the previous session. The catalyst behind the selling pressure was optimism that a large fiscal stimulus package could be passed by U.S. lawmakers ahead of the presidential election on November 3. Comments from President Donald Trump and House Speaker Nancy Pelosi boosted hopes for the new stimulus, prompting some investors to step up bets on riskier currencies.

At 08:51 GMT, the USD/JPY is trading 104.629, up 0.044 or +0.04%.

Yen is Now a Higher-Yielding Currency

The greenback slipped to a four-week low against the Yen on Wednesday, with the Japanese currency logging its best one-day gain since August 28. Real interest rates in Japan are the highest in the G10 right now, which makes the Japanese Yen a very attractive currencies.

The trend could continue over the long-run because the Federal Reserve is committed to holding rates low. As the U.S. economy accelerates, real U.S. interest rates are going to go down further and faster than in other countries. This would keep the pressure on the U.S. Dollar.

Traders should note that when U.S. Government Bond yields were well above Japanese Government Bond yields, the Japanese Yen was treated as a carry currency. U.S. investors would borrow at near zero percent in Japanese Yen. Sell the Yen to buy Dollars then invest in U.S. stocks. So essentially, the USD/JPY rose along with risky assets.

During this current low interest rate environment, you can throw out that strategy. Because the spreads are so tight, there is no carry trade. However, investors are still going to chase the highest yield, and right now, that is in Japan.

Technically Bearish

The main trend is down. If the downside momentum continues then look for the selling to possibly extend into 104.002. This is a potential trigger point for an acceleration to the downside with the next major target the March bottom at 101.185.

Due to the size of Wednesday’s break, we may see some profit-taking today, or a short-covering rally. This could lead to a retracement into 104.807 to 105.056. However, since the main trend is down, we’re likely to see new sellers resurface.

Daily Outlook

Trade the trend, but don’t get married to the short-side. What I mean is that the USD/JPY is trending lower because bearish news is driving U.S. yields lower. So the markets are functioning like they should.

Don’t get complacent or “married” to the trend because conditions could turn quickly if there is no stimulus deal, or if the Bank of Japan or government decides it doesn’t like a stronger Japanese Yen.

Trade the trend, but don’t get caught on the wrong side of a “no deal” or an intervention.

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