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USD/JPY Fundamental Daily Forecast – Driven Higher by Carry Trade Buying

By:
James Hyerczyk
Published: Jul 26, 2017, 06:12 UTC

The Dollar/Yen continued to trade higher on Tuesday, driven by the carry trade, better U.S. economy data and position squaring ahead of the Fed’s interest

Japanese Yen

The Dollar/Yen continued to trade higher on Tuesday, driven by the carry trade, better U.S. economy data and position squaring ahead of the Fed’s interest rate decision and monetary policy statement on Wednesday.

The USD/JPY settled at 111.875, up 0.780 or +0.70%.

A sharp rise in U.S. equity markets on Tuesday helped bring the carry trade back into focus. Increased demand for higher risk assets encouraged investors to borrow in Yen then buy the dollar to invest in higher yielding assets.

The benchmark S&P 500 Index closed at a record high on the back of strong earnings beats.

In economic news, according to the S&P CoreLogic Case-Shiller home price index, major metro area home prices rose 5.7 percent in May. However, this was slightly below the forecast and previous read.

The Home Price Index (HPI) rose 0.4%, lower than the 0.5% estimate. The previous month was revised down to a 0.6% gain.

The Richmond Manufacturing Index was a solid 14, up from 7. It also beat the estimate.

Conference Board Consumer Confidence came in well above expectations at 121.1. Traders were looking for 116.5. The previous month was revised lower to 117.3.

The Dollar/Yen also received a boost after the U.S. government Bond/Japanese Government Bond spread widened, making the dollar a more attractive investment. The yield on the benchmark 10-year Treasury note rose to about 2.312 percent, while the yield on the 30-year Treasury bond was up at 2.898 percent.

USDJPY
Daily USDJPY

Forecast

The direction of the USD/JPY today will be determined by the direction of the U.S. stock market and the Fed’s decision. Increased demand for risky assets is likely to continue to support the Dollar/Yen because of the carry trade.

The U.S. central bank is expected to leave interest rates at current levels while looking at the current health of the U.S. economy. The Fed is also expected to contemplate on what they should do next in terms of strategy, interest rates and their balance sheet.

A hawkish Fed will be a surprise. This will drive up the USD/JPY. We’ll probably see a weaker Dollar/Yen if the Fed is dovish, but I don’t think we’ll see a washout to the downside since this news has already been priced into the market.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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