USD/JPY Fundamental Daily Forecast – Vulnerable to Falling Yields, Stock Market Weakness

Based on Monday’s performance, the price action is likely to be influenced more by the movement in Treasury yields than the stock market. However, this will change if stock prices drop sharply. If this occurs then look for the Japanese Yen to rally because of safe-haven demand.
James Hyerczyk

The Dollar/Yen is trading lower for a second session on Tuesday, but so far there has been no follow-through to the downside following yesterday’s 0.20% decline. Today’s early inside move suggests investor indecision and impending volatility.

Monday’s spike to the downside was originally attributed to safe-haven buying due to weakness in Asia, Europe and the United States. However, by the end of the trading day, traders weren’t sure why the Dollar/Yen sold-off sharply since two of the three major U.S. stock indexes finished higher for the session.

At the end of the session, most traders concluded that the selling pressure was likely attributed to a drop in Treasury yields as traders adjusted positions ahead of the release of the minutes of the March U.S. Federal Reserve monetary policy minutes on Wednesday.

At 06:56 GMT, the USD/JPY is trading 111.350, down 0.147 or -0.13%.

It was a light day on Monday as far as economic data is concerned. In Japan, Consumer Confidence came in below expectations at 40.5. The Economy Watchers Sentiment Index also missed the mark, coming in at 44.8.

In the United States, Factory Orders fell in February for the fourth time in five months, coming in at -0.5%. Economists were looking for -0.4% to -0.5%. The weakness reflected a slowdown in the economy that began late in 2018 and carried on through the early part of the new year. Traders said the weakness could be attributed to a 1.6% drop in February durable goods.

Daily Forecast

We could see much of the same price action on Tuesday as we did yesterday if traders are really adjusting positions ahead of the Fed minutes on Wednesday.

Based on Monday’s performance, the price action is likely to be influenced more by the movement in Treasury yields than the stock market. However, this will change if stock prices drop sharply. If this occurs then look for the Japanese Yen to rally because of safe-haven demand.

We’re looking at another light report day on Tuesday. Traders will get the opportunity to respond to the NFIB Small Business Index, the JOLTS Job Openings and the IBD/TIPP Economic Optimism Index. We could see a reaction in the USD/JPY if there are big misses to the downside in these three reports.

Additionally, investors will be paying close attention to speeches by FOMC Members Quarles and Clarida. Traders will be looking for comments on future Fed policy decisions.

On March 29, Fed Vice Chairman Randal Quarles said that additional rate hikes “may be necessary at some point.” He also expressed confidence in the economy, saying the labor market remains strong, productivity is improving and inflation is in check.

On March 28, Fed Vice Chairman Richard Clarida said the Fed can’t ignore U.S. exposure to overseas risks. “One hears a great deal about the spillovers of U.S. monetary policy to other economies. One hears somewhat less, though, about how global shocks affect the U.S. economy,” Clarida said.

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