USD/JPY Fundamental Daily Forecast – US Dollar’s Safe-Haven Appeal Attracting Buyers

The Dollar/Yen is edging higher for a second-session early Thursday. Despite the stronger demand for higher risk assets, investors are starting to move money back into the U.S. Dollar due to its appeal as a safe-haven asset.

Investors have been tentatively buying stocks this week on optimism over the reopening of the U.S. economy and progress being made toward a coronavirus vaccine. However, they have also been expressing concerns over simmering U.S.-China trade relations as they await the announcement of the U.S. response to China’s security proposal designed to suppress pro-democracy protestors in Hong Kong.

Additionally, on Wednesday, Secretary of State Mike Pompeo targeted Beijing over its efforts to tamp down on dissent in Hong Kong, announcing that the State Department no longer viewed Hong Kong as autonomous and reiterating U.S. support for anti-government protesters there.

Meanwhile, China has warned that it will retaliate against any sanctions imposed and denies the allegations of abuse inside its reeducation camps, which are believed to house as many as a million Uighurs, ethnic Kazakhs and members of other minority groups.

At 03:40 GMT, the USD/JPY is trading 107.809, up 0.089 or +0.08%.

Daily Forecast

With the spread between U.S. Government bond yields and Japanese Government bond yields extremely tight, the carry trade is nearly non-existent. When the spread is wide, investors tend to borrow at low interest rates from Japanese Yen, sell Yen then buy dollars to invest in U.S. stocks. Essentially, when there is demand for risk, the USD/JPY rises.

But since the outbreak of the coronavirus pandemic and the plunge in U.S. interest rates, traders have not adhered to the carry trade. Instead, traders have been treating the U.S. Dollar as a safe-haven asset.

We may be seeing a little of that going on at this time as investors flock to the greenback at the earliest sign of market unrest. It’s not about the economies of Japan and the U.S. at this time, but rather where can an investor get protection and earn some interest at the same time. Right now, that place is the U.S. Dollar.

The carry trade is not likely to come back in full-force until the spread widens significantly between the U.S. and Japanese debt instruments.

For a look at all of today’s economic events, check out our economic calendar.