USD/JPY Fundamental Daily Forecast – Uncertainty Over New Variant Could Slow Fed’s Faster Tapering Plans

The Dollar/Yen finished lower last week after giving back all of its weekly gains in one day amid reports of a recently discovered coronavirus variant. After the news broke late Thursday, investors wasted no time in liquidating riskier positions for the safety of the Japanese Yen in a textbook flight-to-safety reaction.

On Friday, the USD/JPY settled at 113.343, down 2.032 or -1.76%.

News of a new coronavirus variant potentially resistant to current vaccines sent investors dashing for the safety of the Japanese Yen on Friday, while the possible unwinding of U.S. rate hike bets weighed on the U.S. Dollar.

The Yen’s gains came at the expense of growth sensitive currencies like the U.S., Australian and New Zealand Dollars though thinner volumes after Thursday’s U.S. Thanksgiving holiday made market moves more volatile.

According to early reports, little is known of the new COVID-19 variant, detected in South Africa, Botswana and Hong Kong. But scientists reckon it has an unusual combination of mutations that may make it able to evade immune responses and be more transmissible.

Earlier in the week, the Dollar/Yen hit a five-year high, but by the end of the week, the Japanese Yen was in a position to post its best day since March 2020, or near the start of the pandemic.

Treasury Yields Sink Amid Concerns around a New COVID Variant, 10-Year Yield Falls Below 1.5%

U.S. Treasury yields slid on Friday, reversing recent gains amid concerns around a new variant of the coronavirus found in South Africa.

The yield on the benchmark 10-year Treasury note dropped by more than 15 basis points to 1.485%. The yield on the 30-year Treasury bond fell more than 14 basis points to 1.826%.

Traders said investors started selling U.S. Treasury bonds as fears of a new COVID variant found in South Africa started to rise after the U.K. suspended flights from six African countries. More than 30 mutations have been detected in the new variant, raising concern that it could possibly better evade the antibody protection created by vaccines and prior infections.

Short-Term Outlook

Investors will be watching the volume closely on Monday as U.S. banks and institutions return after the extended U.S. holiday. If they feel that Friday’s move was overcooked then look for a snapback rally.

The big worry for Dollar/Yen bulls is the Federal Reserve. They would like to see the Fed continue on a path toward a faster tapering and sooner-than-expected rate hike. However, this all depends on what the experts say about the COVID-19 variant.

If the scientists determine the variant is vaccine resistant then look for the Fed to delay its plans for a speedier tapering. This could pressure yields and consequently the Dollar/Yen.