USD/JPY Fundamental Weekly Forecast – Rising Treasury Yields, Demand for Risk Will Provide Support

The Dollar/Yen finished sharply higher last week, driven by a widening of the spread between U.S. Government bonds and Japanese Government bonds, which made the U.S. Dollar a more attractive investment. The catalyst behind the rally was the progress being made in U.S.-China trade deal negotiations. The rally took the Forex pair to its highest level since the week-ending May 31.

Last week, the USD/JPY settled at 109.243, up 1.052 or +0.97%.

U.S.-China Trade Relations

The dollar climbed to more than a five-month peak against the safe-haven Yen, bolstered by expectations the United States and China were inching closer to a trade deal.

The world’s two largest economies have agreed to roll back tariffs on each other’s goods as part of the first phase of a trade deal, officials from both countries said on Thursday, offering a new sign of progress despite the two sides’ ongoing divisions over trade.

The Chinese commerce ministry, without laying out a timetable, said the two countries had agreed to cancel the tariffs in phases. There was a little controversy, however, on Friday after President Trump said he had not agreed to any rollback in tariffs.

Before Thursday’s announcement on trade, hopes for a deal had been waning after a senior Trump administration official told Reuters on Wednesday a meeting to sign the agreement could be delayed until December and that a venue had not yet been agreed.

U.S. Treasury Yields

Long-term U.S. government debt yields climbed last week as warmer trade relations between Washington and Beijing buoyed equities and pressured bonds.

The 10-year yield jumped to its highest level since August. More importantly, the yield curve, which inverted over the summer and stoked recession fears, also steepened to the widest since January last week. The spread between the 10-year yield and the 2-year yield was last seen at 26 basis points; the 10-year/3 month spread was at 38 basis points.

The surge in yields drove up the U.S. Dollar against the Japanese Yen.

Bank of Japan News

Bank of Japan Governor Haruhiko Kuroda said last week additional monetary easing by the central bank will not be limited to cutting interest rates, while adding that the economy is likely to stay firm despite the recent consumption tax hike.

On October 31, the BOJ said it would further lower borrowing costs if necessary, sending a clearer message to markets as pressure builds on it to follow its U.S. and European counterparts in extending stimulus amid signs of a global economic slowdown.

Under the new guidance, the BOJ is expecting short- and long-term interest rates to remain at their present or lower levels as long as there is a possibility of losing momentum toward its 2 percent inflation goal.

Weekly Forecast

USD/JPY traders are going to continue to monitor the progress of the trade talks between the U.S. and China. They be looking for both parties to announce a signing date and venue of phase one of the partial trade deal and new details about the roll back of the tariffs.

The direction of Treasury yields and demand for risky assets will also be monitored closely. Rising yields will continue to make the U.S. Dollar an attractive asset.

There are no major reports from Japan scheduled, however, traders will get the chance to react to U.S. reports on Consumer Inflation and Retail Sales. Furthermore, Fed Chair Jerome Powell will give Congressional Testimony on Wednesday and Thursday.