USD/JPY Fundamental Daily Forecast – Wave of Positive Developments Underpinning Dollar/Yen

 

Strong demand for risky assets and a surge in U.S. Treasury yields are helping to drive the Dollar/Yen higher on Monday. The moves are being eased by the hope of a trade deal between the United States and China, the lifting of some of the confusion over Brexit and a stronger-than-expected U.S. earnings season. Improving investor sentiment it also encouraging long Japanese Yen hedgers to trim their safe-haven positions.

At 14:18 GMT, the USD/JPY is trading 108.881, up 0.180 or +0.20%.

Speculative Yen buyers are exiting positions and short-sellers may be increasing pressure in anticipation of the announcement of a partial trade deal between the U.S. and China after the U.S. Trade Representative’s office said on Friday that the two countries were “close to finalizing” some parts of a trade agreement.

On Saturday, China’s Commerce Ministry said both side have agreed to properly address core issues, according to a Reuters report. The ministry said in a statement both side have confirmed that the U.S. will import cooked poultry from China, while Beijing will lift a ban on U.S. poultry.

Brexit Reduces Risk Exposure

Long Japanese Yen traders, hoping for further confusion over Brexit, were dealt a blow after the European Union announced and extension with the United Kingdom over Brexit.

The U.K. will now be able to leave the EU at any point before January 31 providing British Prime Minister Boris Johnson can secure approval from Parliament on his exit deal.

Fed Rate Cut Priced In, BOJ Rate Decision Uncertain

On Wednesday, the U.S. Federal Reserve is widely expected to cut its benchmark interest rate 25-basis points. Traders priced this in about 2 weeks ago. As of Monday morning, the CME Group’s Fed Watch Tool showed there is a 90.4% chance of this rate cut.

Dollar/Yen traders aren’t worried about this cut, but they are likely to react to any news that signals an additional rate cut in December.

The Bank of Japan (BOJ) is leaning toward keeping monetary policy steady next week as stable markets, a truce in U.S.-China trade talks and robust domestic demand give it room to save its dwindling ammunition to battle the next recession, sources told Reuters.

Treasury Yields, Stocks Up; Japanese Yen Down

The Fed may be cutting rates, but Treasury yields are rising because long bond traders are liquidating long hedge positions because of improving risk conditions. Demand for stocks is also weighing the Japanese Yen by reducing its importance as a safe-haven asset.

Daily Forecast

The positive sentiment on Monday is driving investors into stocks, helping to underpin the USD/JPY. The Forex pair is now in a position to challenge the October 17 top at 108.939. Taking out this level will indicate the buying is getting stronger. This could trigger an acceleration into the August 1 top at 109.317.