USD/JPY Fundamental Daily Forecast – Stronger-than-Expected PPI Data Should Trigger Rally

The Dollar/Yen was under pressure for a second day at the start of trading on Wednesday due to Tuesday’s decision by the Bank of Japan to trim its buying of long-dated Japanese government bonds in market operations.

The USD/JPY settled at 111.424, down 1.217 or -1.08%.

The move by the BoJ came as a surprise although some traders said it was just a technical tweak in line with the central bank’s policies to date. However, traders may have overreacted to the news because they thought it meant the Japanese central bank could be poised to begin winding down its stimulus.

A second wave of selling hit the USD/JPY on Wednesday after a report China was ready to slow or halt its purchases of U.S. Treasurys.

The combination of the BoJ action and the news about China caused the U.S. Dollar to post its biggest one-day drop in nearly eight months against the Japanese Yen

According to reports from Bloomberg News, citing people familiar with the matter, officials reviewing China’s foreign-exchange holdings have recommended slowing or halting purchases of U.S. Treasuries.

Forecast

The USD/JPY is trading higher early Thursday, but inside yesterday’s range. This indicates investor indecision and impending volatility. Traders may be paring positions against a slew of U.S. economic data on Thursday and Friday.

On Thursday, investors will get the opportunity to react to a slew of U.S. economic data including the Producer Price Index, Weekly Unemployment Claims and the Federal Budget Balance. FOMC Member William Dudley is also scheduled to speak late in the trading day.

The U.S. Dollar could rise if producer inflation comes in higher than the 0.2% estimate.

Additionally, Reuters is reporting that a report that China is considering slowing or halting purchases of U.S. Treasury bonds may be based on erroneous information and could be “fake,” the country’s foreign exchange regulator said on Thursday.

The early price action suggests investors may have already put the BoJ and China news behind them and are now focusing on the U.S. economic data and its impact on Treasury rates. Therefore, any report that supports higher yields will likely be bullish for the USD/JPY.