USD/JPY Fundamental Weekly Forecast – Treasury Yields, Appetite for Risk Biggest Influences on Dollar/Yen Prices

The direction of U.S. Treasury yields will be the primary influence on the direction of the Dollar/Yen trade this week. Yields will be influenced by investor demand for risk.
James Hyerczyk
USD/JPY

The Dollar/Yen rose last week mostly on safe-haven buying related to a downgrade of the Euro Zone economy by the European Commission. Lower demand for higher-yielding assets fueled by renewed concerns over U.S.-China trade relations sent investors into the safety of the Japanese Yen. A drop in Treasury yields also tightened the spread between U.S. Government bonds and Japanese Government bonds, making the U.S. Dollar a less-attractive investment.

For the week, the USD/JPY settled at 109.761, up 0.256 or +0.23%.

Safe-Haven Driven by Numerous Events

A series of events throughout the week helped drive up demand for the safe-haven Japanese Yen. Lower Treasury yields were the main factor making the Japanese Yen an attractive asset. The catalysts behind the Japanese Yen’s strength were concerns over the weakening global economy and renewed concerns over U.S.-China trade relations which drove down appetite for higher risk assets.

European Commission Lowers Outlook for Euro Zone Economy

The European Commission sharply cut its forecasts for Euro Zone economic growth this year and next on expectations the bloc’s largest countries will be held back by global grade tensions and domestic challenges. The Commission said Euro Zone growth will slow to 1.3 percent this year from 1.9 percent in 2018, before rebounding in 2020 to 1.6 percent.

Negative News About U.S.-China Trade Relations Drives Down Appetite for Risky Assets

Negative comments about U.S.-China trade relations drove U.S. stock indexes lower last week, driving investors into the safety of the Japanese Yen.

The major stock indexes topped out and the selling began after White House economic advisor Larry Kudlow said that China and the U.S. were still far away on striking a trade deal. Later in the session, stocks weakened further after CNBC reported that the Trump-Xi meeting before the March 2 deadline was “highly unlikely.”

Weekly Forecast

The direction of U.S. Treasury yields will be the primary influence on the direction of the Dollar/Yen trade this week. Yields will be influenced by investor demand for risk.

The key events that could impact investor demand for risk will be a speech by Fed Chair Jerome Powell. He’ll exert more influence on the financial markets if he talks about monetary policy and especially the slowing global economy.

On Wednesday, traders will get the opportunity to react to the latest government figures on consumer inflation. CPI is expected to come in at 0.1%, up slightly from the previously reported -0.1%. Core CPI is expected to have grown by 0.2%.

On Thursday, U.S. Core Retail Sales are expected to come in flat at 0.0%. Retail Sales are expected to have risen by 0.1%. Producer Prices may have risen by 0.1%.

The low inflation numbers aren’t expected to have much of an influence on Fed policy since it has predicted muted inflation. Much lower than expected numbers could drive Treasury yields lower which would make the U.S. Dollar a less-desirable asset.

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