USD/JPY Fundamental Daily Forecast – Pressured by Flight-to-Safety Buying

Flight-to-safety buying is driving the Dollar/Yen lower on Friday. Money is flowing into the Japanese Yen and out of higher-risk assets on a report from a South Korea newspaper that North Korea is preparing to test a nuclear device in the Pacific Ocean over the week-end.

At 1123 GMT, the USD/JPY is trading 112.021, down 0.457 or -0.41%.

According to a report from South Korea’s official news agency Yonhap, North Korean Minister of Foreign Affairs Ri Yong Ho said that his country may consider a test of a hydrogen bomb in the Pacific Ocean.

Ri said the potential test of the “most powerful detonation of an H-bomb” would be one possible “highest-level” action against the U.S. according to the report.

Global investors are looking at this event differently than the recent North Korean missile launches over Japan because it will move North Korea’s nuclear weapons activities beyond its borders for the first time.

Worries about North Korea may have temporarily knocked the USD/JPY off of its bullish course although the sharp divergence between U.S. and Japanese monetary policy continue to make the U.S. Dollar a more favorable investment over the long-run.

Forecast

Given the geopolitical situation, the direction of the USD/JPY the rest of the session is a toss-up. After recent missile firings by North Korea, traders had responded with a knee-jerk move into the safe-haven Japanese Yen. However, those moves have been getting shorter in duration, suggesting investors weren’t concerned about an escalation of events.

However, at this time, we’re just looking at a threat and not an actual event so worried investors may have to hold on to their safe haven positions a little longer, or at least until after the week-end to see if North Korea follows through with the nuclear bomb test.

Although the short-term fundamentals support the USD/JPY, long investors may use the news as an excuse to pack it in early ahead of the week-end. Unless the North Korean threat disappears, I’m looking for weakness by the USD/JPY today.