USD/JPY Fundamental Daily Forecast – Weakens as Stocks, Yields Edge Lower

The Dollar/Yen is trading only slightly better early Tuesday following yesterday’s strong surge. The price action suggests investors are still trying to determine if we’re looking at a risk on, or a risk off trading session. Treasury yields are edging lower in the futures markets which could be weighing on demand for the dollar. We’re also looking at early stock market weakness which may be a sign of diminished appetite for risk.

At 04:52 GMT, the USD/JPY is trading 111.339, down 0.020 or -0.02%.

Prices rose sharply on Monday on the back of stronger factory data out of China and the U.S. This helped dampened fears of a slowing global economy. The news drove up Treasury yields and increased demand for riskier assets which made the U.S. Dollar a more desirable asset than the Japanese Yen.

Surprise Growth Fuels the Dollar/Yen Rally on Monday

On Sunday, data released by China’s National Bureau of Statistics, showed the official Purchasing Managers’ Index rose to 50.5 in March from February’s three-year low of 49.2. It marked the first expansion in four months.

Early Monday, the Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) came in at 50.8 for March. Analysts were looking for a 49.9 reading.

In the U.S., the value of overall sales fell 0.2 percent after an upwardly revised 0.7 percent increase the prior month, according to Commerce Department figures released Monday. The median forecast of economists surveyed by Bloomberg called for a 0.2 percent gain.

Business Inventories came in higher than expected at 0.8%, a bearish sign. Traders were looking for an increase of 0.4%. The prior month was also increased to 0.8%.

U.S. construction spending increased for a third straight month in February, boosted by gains in both private and public construction projects. The Commerce Department said on Monday construction spending rose 1.0 percent to a nine-month high after an upwardly revised 2.5 percent surge in January.

The primary driver of the U.S. stock market rally was a report on U.S. manufacturing, which showed activity rebounded a little more than expected in March. According to the Institute for Supply Management (ISM), national factory activity rose to 55.3 from 54.2 in February, which had been its lowest level since November 2016. Traders were looking for a readying of 54.5.

Daily Forecast

Stocks are up in Asia, but down in the U.S. which suggests a possible two-sided trade due to investor indecision. Falling Treasury rates are likely exerting the most downside pressure on prices. Traders could also be starting to square positions ahead of Friday’s major U.S. Non-Farm Payrolls report.

Data from Japan as well as the Reserve Bank of Australia’s decision to keep rates on hold have had little to do with today’s low volatility and volume.

After Monday’s larger-than-average daily range, traders are likely to hold the USD/JPY in a tight range until the release of reports on U.S. Core Durable Goods Orders and Durable Goods Orders at 12:30 GMT. Core Durable Goods Orders are expected to rise 0.3%, up from -0.2% and Durable Goods Orders are predicted to have fallen 1.1%, down from 0.3%.

The tone of the market this week is likely to be determined by trader reaction to a support zone at 111.088 to 110.825.