USD/JPY Fundamental Daily Forecast – Tight Range as Price Action Mirrors Treasury Yields, Risk Appetite

The Dollar/Yen fell marginally on Tuesday as investors reacted to a drop in U.S. Treasury yields.  The move into safe haven Treasuries and the Japanese Yen was primarily fueled by increasing concerns that the United States could pull out of its trade agreement with Canada and Mexico.

The USD/JPY settled at 109.800, down 0.118 or -0.11%.

Geopolitical concerns also led to flight to safety buying of U.S. Treasuries and Japanese Yen. Traders were reacting to a speech by Italy’s new Prime Minister Giuseppe Conte, who vowed to enact economic policies that could balloon the nation’s already-heavy debt load.

In U.S. economic news, Final Services PMI came in better-than-expected at 56.8. The JOLTS Job Openings report also improved to 6.70M, beating the 6.49M forecast. The previous number was revised better to 6.63M.

The major report was ISM Non-Manufacturing PMI. It came in at 58.6, better than the forecast of 57.9 and the previously reported 56.8.

Treasuries fell on Tuesday as investors looked for safety amid lingering trade and mild geopolitical tensions.

The yield on the benchmark 10-year Treasury note was lower at 2.913, while the yield on the 30-year Treasury bond was also in the red at 3.07 percent.

Forecast

On Wednesday, conditions have calmed enough early in the session to allow the USD/JPY to post a modest gain. At 0551 GMT, the USD/JPY is trading 109.904, up 0.102 or +0.09%.

Dollar/Yen traders should keep an eye on Italy today. Yesterday, Italy’s new Prime Minister Giuseppe Conte stirred the political turmoil pot a little by his announcement of new government tax cuts and higher welfare. This news sent Italian bond yields higher.

Traders should also watch the lingering trade tensions over the North American Free Trade Agreement (NAFTA) negotiations. White House economic adviser Larry Kudlow said that President Donald Trump is considering holding separate talks with Canada and Mexico. This raised concerns that the Trump Administration may be leaning towards scraping NAFTA.

Investors should not overlook development in the trade negotiations between the United States and China. According to the Wall Street Journal, citing sources, China would agree to buy nearly $70 billion worth of U.S. agriculture and energy products if the U.S. holds off on implementing tariffs against Chinese goods.

On the economic forefront, USD/JPY investors will get the opportunity to react to reports on Revised Nonfarm Productivity, Revised Unit Labor Costs and the U.S. Trade Balance. The trade balance could be a market mover. It is expected to increase to $50.0 Billion.

Once again, the direction of Treasury yields and appetite for risky assets should control the movement in the USD/JPY.