USD/JPY Fundamental Daily Forecast – Weakens after Trump Threatens China with Additional Tariffs

The Dollar/Yen closed lower on Monday. The selling pressure was driven by some light safe haven buying, repatriation and weaker U.S. Treasury yields.

An early sell-off in U.S. equity markets helped drive up demand for the safe haven Japanese Yen. The catalyst behind the stock market weakness was worries over an escalation of a developing trade war between the United States and China.

Repatriation was triggered by a deadly earthquake in Japan. This move usually takes place after a natural disaster and can be considered a form of safe haven buying.

U.S. government debt yields fell on Monday as trade worries continued to rattle investors. The yield on the benchmark 10-year U.S. Treasury note traded at 2.93 percent, while the yield on the 30-year Treasury bond held at 3.058 percent. These moves helped tighten the spread between U.S. Government bond yields and Japanese Government bond yields, making the Yen a more attractive asset.

In economic news, Atlanta Fed President Raphael Bostic said the potential of a trade war is dampening the prospects for above-trend economic growth.

In a prepared statement, Bostic said:  “I began the year with a decided upside tilt to my risk profile for growth, reflecting business optimism following the passage of tax reform. However, that optimism has almost completely faded among my contacts, replaced by concerns about trade policy and tariffs.”

Forecast

The Dollar/Yen is trading sharply lower early Tuesday, driven by fresh trade war concerns after President Trump fired back at Beijing with a threat of new tariffs on $200 billion in Chinese goods. U.S. equity indexes broke on the news, triggering a carry trade response and sending investors scurrying for the safety of the lower risk Japanese Yen.

At 0141 GMT, the USD/JPY is trading 110.132, down 0.0419 or -0.38%.

Early Tuesday, Trump requested the United States Trade Representative to identify $200 billion worth of Chinese goods for additional tariffs at a rate of 10 percent.

The new duties will go into effect “if China refuses to change its practices, and also if it insists on going forward with new tariffs that it has recently announced,” the president said in a statement provided by the White House late on Monday.

On Tuesday, investors will get the opportunity to react to a pair of U.S. economic reports. Building Permits are expected to come in at 1.35M, slightly below the previously reported 1.36M. Housing Starts are expected to come in at 1.31 million units, up slightly from 1.29 million units.

The tone of the market is bearish because of Trump’s new tariff threat. The USD/JPY could plunge if China retaliates with a new threat of additional tariffs on U.S. goods. The price action in the U.S. stock market and Treasury markets is likely to dictate the movement in the Dollar/Yen.