USD/JPY Fundamental Daily Forecast – Gaps Lower, but Showing Limited Reaction to North Korean Threat

The Dollar/Yen is trading higher early Monday as investors trimmed positions in higher risk assets after North Korea’s latest nuclear weapons tests.

At 0405 GMT, the USD/JPY is trading 109.806, down 0.430 or -0.39%. Early in the session, the Forex pair tested 109.477 before rebounding. Investors are moving money from U.S. equity markets to the safety of gold, U.S. Treasurys and the lower-yielding Japanese Yen. This is essentially the same move we saw last week after North Korea launched a missile over Japan.

Volume is down because Monday is a U.S. holiday, however, this could lead to increased volatility and exaggerated moves because of the absence of the major players.

Following the latest nuclear test, which Pyongyang said was a hydrogen bomb, U.S. President Donald Trump refused to rule out military action and threatened to cut off trade with any country doing business with North Korea.

Speaking outside the White House after meeting with Trump and his national security team, U.S. Defense Secretary Jim Mattis said Trump asked to be briefed on all available military options.

“Any threat to the United States or its territories, including Guam or our allies will be met with a massive response, a response both effective and overwhelming,” Mattis said. However, investors aren’t sure what “threat” means since North Korea launched a missile over Japan last week and has verbally threatened South Korea, Australia and Guam in recent months.

The rebound from its earlier low suggests that market participants are not expecting any prolonged market turmoil so it is expected to be business as usual on Monday in the financial markets. Some traders went as far to say that market participants probably regard North Korea’s actions as attempts to gain negotiating advantage.