USD/JPY Fundamental Daily Forecast – Stock Market Gains are Driving Down Demand for Safe-Haven Yen

With U.S. rates rising and Japanese rates being capped by Bank of Japan policy, the widening spread between U.S. Government bonds and Japanese Government bonds is also helping to make the U.S. Dollar a more attractive asset.
James Hyerczyk

The Dollar/Yen is trading higher at the mid-session after rebounding from earlier weakness. The early weakness was fueled by uncertainty ahead of the release of a series of earnings reports. Better-than-expected earnings is helping to drive up demand for higher-yielding assets and this includes the U.S. Dollar. The move today is basically all about the carry trade. Investors are borrowing in cheap Yen and buying stocks in U.S. Dollars. This is helping to drive up the dollar and drive down the Japanese Yen.

At 14:27 GMT, the USD/JPY is trading 111.954, up 0.022 or +0.02%.

Helping to boost stocks are Dow members Coca-Cola and United Technologies which reported better-than-expected quarterly earnings on Tuesday, Their shares rose 2.1% and 3.3%, respectively.

Additionally, Twitter shares surged 14.7% on its stronger-than-expected results. The social media company said its monthly active users totaled 330 million, more than a FactSet estimate of 318 million.

Furthermore, defense giant Lockheed Martin also rallied more than 6% after its earnings easily topped expectations. Procter & Gamble also posted stronger-than forecast earnings.

Overall, it’s been a solid earnings season after early projections called for the worst results since 2016. According to FactSet, the results so far have largely topped expectations. More than 78% of the S&P 500 companies that have reported have surpassed analyst expectations.

Traders are also saying that a drop in market volatility is driving up demand for riskier assets. This is mostly being driven by a four-week rise in 10-year Treasury yields. With U.S. rates rising and Japanese rates being capped by Bank of Japan policy, the widening spread between U.S. Government bonds and Japanese Government bonds is also helping to make the U.S. Dollar a more attractive asset.

On the data front, the U.S. Home Price Index fell 0.3% and the Richmond Manufacturing Index came in lower than expected. However, both reports were offset by a surge in New Home Sales by 692K units. This beat the 647K forecast. The previous month was revised lower to 662K units.

Early Thursday, the Bank of Japan will release its latest interest rate decision. It is expected to keep rates unchanged.

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