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USD/JPY Fundamental Daily Forecast – Weaker on Rising Fed Rate Cut Expectations

Falling yields are essentially tightening the spread between U.S. Government bonds and Japanese Government bonds, making the U.S. Dollar a less-attractive investment.
James Hyerczyk

The Dollar/Yen is trading lower on Thursday with the weakness being fueled by safe-haven buying of the Japanese Yen. The selling is being driven primarily by overall weakness in the global equity markets and overall expectations of further shedding of risky assets related to the rapidly spreading coronavirus outbreak.

The U.S. Dollar is also losing ground to its Japanese counterpart as Treasury yields continued to hit new lows and investors bet the Federal Reserve would cut interest rates to offset the impact of the coronavirus on the U.S. economy.

Falling yields are essentially tightening the spread between U.S. Government bonds and Japanese Government bonds, making the U.S. Dollar a less-attractive investment.

At 09:38 GMT, the USD/JPY is trading 110.080, down 0.335 or -0.30%.

Dollar Weakens as Coronavirus Fallout Raises Fed Rate Cut Expectations

Money markets are now fully pricing in a 25-basis point rate cut in the Fed’s rate by April and three by March 2021.

But analysts point out that with Fed rates much higher, and therefore the range them to fall much larger, investors are dumping the dollar – reversing some of the U.S. currency’s gains over the past month.

The dollar rose sharply against the Japanese Yen recently when it’s safe haven currency credentials and investors’ belief that the U.S. economy was relatively sheltered from the coronavirus fallout encouraged buying of the greenback. Additionally, some say investors were aggressively dumping the Japanese Yen on the belief that its economy was headed toward a recession.

Moving forward, the direction of the USD/JPY, which touched a multi-month high on February 20 at 112.226, would be dependent on economic data on the coronavirus’s impact on confidence and trade outside of China.

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Trump Says Coronavirus Risk in US is Low

President Donald Trump told Americans on Wednesday that the risk from coronavirus remained “very low,” and placed Vice President Mike Pence in charge of the U.S. response to the looming global health crisis.

He also said the spread of the virus in the United States was not “inevitable” and then went on to say: “It probably will, it possibly will. It could be at a very small level, or it could be at a larger level. Whatever happens we’re totally prepared.”

Daily Forecast

With U.S. equity markets poised to drop further over the near-term and Treasury yields continuing to fall, it’s hard to build a case for a rapid turnaround in investor sentiment so we expect to see the USD/JPY move lower.

We could see periodic short-covering rallies in the USD/JPY but they are likely to create fresh shorting opportunities. The downtrend is likely to continue unless the Bank of Japan provides stimulus of its own.

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