USD/JPY Fundamental Daily Forecast – Trade Relatively Calm Despite Yield Curve Inversion

The Dollar/Yen is trading nearly flat on Wednesday with the Forex pair posting an extremely tight trading range on well-below average volume. The lack of fresh developments over U.S.-China trade relations is helping to limit the price action as well as end-of-the-month position squaring.

There were no major economic releases overnight and chatter between the United States and China has been kept to a minimum this week, which is making it difficult to make investing decisions after Monday’s strong rally.

At 07:46 GMT, the USD/JPY is trading 105.748, down 0.025 or -0.02%.

Market Influences

Helping to keep a lid on the Dollar/Yen is lower Treasury yields. They are helping to tighten the spread between U.S. Government bond yields and Japanese Government bond yields, making the Japanese Yen a more attractive currency.

Dollar/Yen traders are also paying close attention to the movements in the U.S. Treasurys on Wednesday because of worries that a yield curve inversion may be signaling a possible U.S. recession. On Tuesday, the spread between the 10-year Treasury yield and the 2-year rate fell to negative 5 basis points, its lowest level since 2007.

The inversion continued into the afternoon of Asian trading hours on Wednesday, with the yield on the 10-year Treasury note last at 1.4844% versus a rate of 1.522% for the 2-year Treasury note.

The 3-month Treasury bill rate also traded higher than the 30-year bond yield after the 30-year yield hit a record low.

Perhaps helping to put a floor in the Dollar/Yen trade on Wednesday are U.S. stock index futures, which were set to open slightly higher Wednesday morning based on the pre-market futures trade.

Other Influences

The economic data from both the United States and Japan has been light this week. Besides, investors have been paying more attention to U.S.-China trade relations than they have to economic reports. This is because the data is stale, and the escalating trade dispute represents the future. Additionally, the market has already priced in a Fed cut of 25-basis cuts for September. If there is going to be a surprise then it will come if investors start leaning more toward a 50-basis point rate cut.

Daily Forecast

It’s possible that the major traders have already begun shutting down for the U.S. Labor Day bank holiday on Monday, September 2. Therefore, we could see a rangebound trade until next week when traders return from a long holiday weekend.

Furthermore, the U.S. and China may be going through a cooling off period after last Friday’s flurry of activity. I’m also looking for both sides to announce some sort of a cease fire on new tariffs ahead of the September trade negotiations.

Looking at the early price action in the Treasurys and the stock market as well as the tight trading ranges in the so-called safe-haven assets, I don’t see any fear or sense of urgency so conditions may be calming down.