USD/JPY Fundamental Daily Forecast – Hurricane Damage Will Hit U.S. Economy Hard

The Dollar/Yen is trading lower early Monday, pressured by lower U.S. Treasury yields and a weaker U.S. stock market. Some of the move is follow-through selling related to Friday’s dovish speech by Fed Chair Janet Yellen and some is in response to the hurricane damage in Texas that should weigh on the economy.

At 0548 GMT, the USD/JPY is trading 109.153, down 0.170 or -0.16%.

On Friday, Dollar/Yen traders primarily reacted to a mixed U.S. stock market and falling U.S. Treasury yields.

Yellen offered comments on financial stability, but refrained from talking about monetary policy. This led investors to label the speech as dovish.

No one really expected Yellen to address future interest rate hikes, but some thought she’d mention her concerns over low inflation and perhaps announce the start of the Fed’s plan to begin trimming its massive $4.5 trillion balance sheet after the September FOMC meeting.

Yellen also sent a message to President Trump, saying that if he re-nominates her as Federal Reserve Chair, she will not turn her back on the raft of U.S. financial reforms that Republicans want to roll back.

U.S. Treasury yields fell after Yellen’s speech, making the U.S. Dollar a less-attractive investment. The yield on the benchmark 10-year Treasury Note fell to 2.171 percent, while the yield on the 30-year Treasury bond dropped to 2.752 percent.

In other news, Federal Reserve Governor Jerome Powell also said low inflation and a strong labor market in the United States are allowing the Federal Reserve to be “patient” about when it next raises interest rates.

Dallas Federal Reserve Bank President Robert Kaplan repeated his call for patience on raising interest rates any further, but called for the speeding up of the reduction of the Fed’s balance sheet.

All of these comments led to the tightening of the spread between U.S. Treasury Bonds and Japanese Government Bonds, making the Japanese Yen a more attractive investment.

Forecast

The direction of the USD/JPY will be determined by trader reaction to U.S. Treasury yields and equities. Both could be under pressure due to the hurricane damage in Texas. No one knows the cost of the damage yet, but it has to be in the billions of dollars.

Stocks could fall which would be supportive for the Japanese Yen. The insurance and airlines sectors are expected to be hit hardest.