USD/JPY Fundamental Daily Forecast – Will BOJ Concerns Encourage Position-Squaring, Profit-Taking?

The Dollar/Yen posted another strong gain on Wednesday as investors continued to react to rising U.S. Treasury yields. Yesterday’s sharp rally drove the Forex pair into its highest level since February 8.

Additionally, this week’s Bank of Japan interest rate and monetary policy decision has taken a backseat to rising rates because the central bank is widely expected to leave interest rates at historically low levels and signal no change in policy.

Let’s face it, the BOJ wanted a weaker Japanese Yen and they are getting it. This should help the economy if it leads to increased exports.

On Wednesday, the USD/JPY settled at 109.419, up 0.614 or +0.56%.

Rising U.S. Treasury yields pushed the dollar higher against the Japanese Yen on Wednesday. The USD/JPY is still well below its high for the year at 113.381 and last year’s close at 112.646, but the daily chart shows there is plenty of room to the upside especially if the move continues to gather momentum.

The catalysts driving yields higher are worries about the growing supply of government debt and inflationary pressures from rising oil prices.

The contrast in central bank policy is also supporting the rise in the USD/JPY. Simply stated, the U.S. Federal Reserve is widely expected to raise interest rates at least two more times this year, while the Bank of Japan is expected to continue to leave rates unchanged. This is causing the spread between U.S. Government Bonds and Japanese Government Bonds to widen, making the dollar a more attractive investment.

Forecast

We’re looking for the USD/JPY to strengthen if it continues to get support from rising U.S. Treasury yields.

U.S. government debt yields rose on Wednesday, with the rate on the benchmark 10-year Treasury note inching above the psychological 3 percent level it hit Tuesday for the first time since 2014. Late Wednesday, the yield was hovering around 3.028 percent, down from 3.033 percent hit earlier in the session, its highest level since January 2, 2014. Traders and speculators may be targeting 3.05 percent, the T-note’s highest level since 2011.

The yield on the two-year Treasury note also extended its gains, up to over 2.5 percent and its highest level since September 2008. The yield on the 30-year Treasury bond was higher at 3.214 percent.

Economic reports could come into play today as they could create some uncertainty if they miss their mark. Furthermore, we could see some position-squaring and profit-taking ahead of the Bank of Japan interest rate decision and monetary policy statement as well as Friday’s U.S. GDP report.

In the U.S., traders will get the opportunity to react to the latest data on Durable Goods, Weekly Unemployment Claims, Goods Trade Balance and Preliminary Wholesale Inventories.