USD/JPY Fundamental Daily Forecast – Traders Tracking Treasury Yields, Not Headlines

The Dollar/Yen closed higher on Tuesday, recapturing some of the previous session’s lost as investors looked toward the safety and protection of the U.S. Dollar. Problems in Afghanistan, new COVID-related lockdowns and mixed U.S. economic data also drove the price action.

On Tuesday, the USD/JPY settled at 109.590, up 0.324 or +0.30%.

Flat Treasury Yields Provide Some Support

U.S. Treasury yields were steady on Tuesday after July’s retail sales data came in worse than expected, and U.S. Industrial Production beat the forecast. This was actually good news for the Dollar/Yen after Monday’s steep plunge was fueled by the tightening of the spread between U.S. Government bond yields and Japanese Government bond yields.

The yield on the benchmark 10-year Treasury note was flat at 1.258% near the close. The yield on the 30-year Treasury bond was flat at 1.924%.

Economic News Helps Hold Yields, Dollar/Yen in Range

Treasury yields dipped slightly after the Census Bureau said Tuesday that retail sales fell 1.1% in June, driven largely by a drop in car sales. Economists expected retail sales to fall by 0.3% in July, compared to a revised 0.7% gain in June, according to Dow Jones consensus forecast. Excluding autos, sales were down 0.4% compared to estimates of a 0.2% slowdown.

Shortly after the release of the retail sales report, another report showed U.S. manufacturing production accelerated on autos in July. This helped underpin yields, essentially neutralizing the retail sales report and the movement in the Dollar/Yen.

Production at U.S. factories surged in July, boosted by an acceleration in motor vehicle output as automakers either pared or canceled annual retooling shutdowns to work around a global semiconductor shortage.

Manufacturing output jumped 1.4% last month after falling 0.3% in June, the Federal Reserve said on Tuesday. Economists polled by Reuters had forecast manufacturing production rising 0.6%.

Short-Term Outlook

Whip-saw action in the U.S. equity markets also drove investors into the safety of the U.S. Dollar. Safe-haven demand was also bolstered by the unrest in Afghanistan, a slowing Chinese economy, and the rapid spread of the Delta coronavirus variant which forced some lockdowns.

The USD/JPY could continue to strengthen if these factors continue to cause uncertainty. However, the direction of the Forex pair will turn lower quickly if U.S. Treasury yields resume their downtrend.