USD/JPY Fundamental Daily Forecast – Stock Market Sell-Off Likely to Favor Dollar/Yen

The Dollar/Yen is trading lower but inside Monday’s wide range for a second session as investors continue to gauge the risk in the markets. The current price action suggests a small tug of war is taking place as investors try to decide whether we’re in a “risk-on” or “risk off” market, and which currency is the most favored safe-haven asset.

At 05:08 GMT, the USD/JPY is at 105.436, down 0.042 or -0.04%.

After posting steep losses last Friday and on Monday, the USD/JPY settled down on Tuesday to post a small gain. The sell-offs were fueled by optimism over a U.S. fiscal stimulus bill after President Trump proposed a $1.8 billion package. However, traders returned to the U.S. Dollar on Tuesday as hopes faded that U.S Republicans and Democrats will reach a compromise on a second round of fiscal stimulus, which would deal a blow to the economic outlook.

On Wednesday, the Dollar/Yen was further supported as risk appetite weakened after Johnson & Johnson said on Tuesday it is pausing a clinical trial of a coronavirus vaccine and Eli Lilly and Co also said it paused a coronavirus antibody treatment.

China is Snapping up Japanese Government Bonds, and It’s Not Just for the Returns

China’s recent purchase of Japanese government bonds surged to the highest level in more than three years – as the country more than tripled its holdings between April and July this year, compared to the previous year, CNBC reported.

Yields on such bonds are near zero, making them an unlikely option as an investment. But analysts told CNBC there are other reasons why China would want to buy those bonds.

China can actually earn more on the investment by buying 30-year JGBs in Japanese Yen and swapping their currency exposure back into U.S. Dollars, according to Ross Hutchison, investment director of global fixed income at Aberdeen Standard Investments.

It (China) can pick up an additional 0.56% by doing so, according to Hutchison. Longer-term bonds typically have higher yields as investors need to take on higher risks for holding on to them for a longer period of time.

“Many reserve managers buy JGB’s and then swap or hedge the currency back into dollars, earning an additional ‘basis’ premium,” said David Nowakowski, a senior strategist of multi-asset and macro at Aviva Investors.

It’s also possible that China may be trying to manage the appreciation of the Yuan, as the Chinese currency spiked against the Japanese Yen in June, Hutchinson pointed out. Selling off the Yuan to buy JGBs, which are denominated in Yen, could help curb some of that appreciation.

Daily Forecast

Tuesday’s price action suggests that a steep sell-off in the stock market will likely send investors into the U.S. Dollar, driving the USD/JPY higher. While Friday and Monday’s price action suggests progress toward a stimulus bill will likely drive the U.S. Dollar lower, leading to a weaker USD/JPY.

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