USD/JPY Fundamental Daily Forecast – Weaker as Specs Increase Bets Fed Will Try to Anchor Treasury Yields

The Dollar/Yen is trading sharply lower for a third straight session on Wednesday as traders prepare for the U.S. Federal Reserve’s interest rate and monetary policy decisions at 18:00 GMT. Fed Chair Jerome Powell will also hold a press conference shortly after the initial announcements. Additionally, Fed policymakers will also release their new economic and interest rate forecasts.

At 08:24 GMT, the USD/JPY is trading 107.298, down 0.443 or -0.41%.

Fed Takes Center Stage

Investor focus has switched to the Fed’s economic outlook and whether a steepening of the U.S. yield curve during last week’s bond market selloff might prompt intervention at longer tenors. In finance, tenor refers to the time-to-maturity of a loan or other financial contract.

Basically, USD/JPY speculators are betting that the Fed will take steps to flatten the Treasury curve. Ahead of the Fed’s announcements later today, speculation is growing that the U.S. central bank might adopt yield targets on bonds, or some other measures to anchor long-term yields.

Japanese Banks Gobble Up Half of Fed Dollar Funding

About half of dollar funding provided to global central banks by the U.S. Federal Reserve in response to pandemic-triggered liquidity concerns have gone to Japan, where banks are hungry for the greenback due to their expanding operations abroad.

Outstanding cross-currency swaps stood at $447 billion as of Thursday, according to the Federal Reserve Bank of New York. The Bank of Japan was the biggest taker on the list by far with $222 billion, about 50% more than the second-ranked European Central Bank at $145 billion. The difference was even more pronounced compared with others on the list, like the Bank of England at $23.1 billion.

The BOJ’s heavy participation in dollar swaps “show there is much stronger demand for dollars among Japan’s banks than among their foreign counterparts,” said Izuru Kato at Totan Research.

“The demand for dollars is not as high as it once was, but concerns over the dollar supply persists,” said Ayaka Nakamura at the Daiwa Institute of Research.

Japan’s Machinery Orders, Wholesale Prices Sink as Businesses Cut Spending

Japan’s machinery orders slumped in April at their quickest pace in nearly two years, as a drop in demand and company profits caused by the coronavirus pandemic paralyzed businesses spending.

Separate data showed May wholesale prices fell at the fastest annual pace in nearly four years, keeping alive market fears Japan may slide back into deflation.

The weak readings will pressure policymakers to take bolder action to support an economy already headed for deeper recession caused by the pandemic.

Daily Forecast

Most global investors don’t expect the Fed will try to anchor Treasury yields. However, there is a lot of chatter about such a possibility ahead of the Fed announcements.

Traders said Japanese investors have been heavy sellers of U.S. Dollars for Japanese Yen this week, positioning for possibly lower U.S. yields.

If the Fed does not take action on Wednesday then look for a huge rally by the USD/JPY. It could recover more than half of this week’s losses.