USD/JPY Fundamental Daily Forecast – Yen Supported by Huge Short-Covering Rally

The Dollar/Yen is trading sharply lower in reaction to a steep drop in U.S. equity markets on the opening. Stocks are trading sharply lower on Friday with the Dow dropping 300 points on fears that a trade war could take place after President Trump announced tariffs on steel and aluminum imports.

Trump said on Thursday that the U.S. will implement a 25 percent tariff on steel imports and a 10 percent tariff on aluminum imports next week. The news triggered a steep break in U.S. stocks as it raised concern that other countries may implement retaliatory tariffs on U.S. exports.

The USD/JPY is down significantly on the stock market opening as prospects of a trade war gripped the markets.

The Japanese Yen is also being supported by Bank of Japan Governor Haruhiko Kuroda’s announcement that the central bank will consider an exit from its ultra-easy monetary policy if its inflation target is achieved in the year ending in March 2020.

According to the latest data from the Commodity Futures Trading Commission, short Japanese Yen positions, at $12.62 billion, are near record levels hit in early 2014 as investors have bet that monetary policy divergence between the U.S. central bank and the Bank of Japan will increase over time.

Given this information, we have to conclude that much of today’s rally is being fueled by massive short-covering. Investors seem to be more reactive to the shedding of risky assets, rather the strong possibility of rising U.S. Treasury yields.

Continue to look for short-sellers to press the USD/JPY lower as long as U.S. equity markets are being pressured by investor liquidation.