USD/JPY Fundamental Daily Forecast – Rises if Risk is On, Falls if Risk is Off

Safe-haven buying drove the Japanese Yen higher against the U.S. Dollar on Tuesday, following a volatile trading session. Initially, the Dollar/Yen was supported by robust U.S. economic data. This news drove up U.S. Treasury yields, making the U.S. Dollar a more attractive investment.

The USD/JPY settled at 110.329, down 0.395 or -0.36%.

Trading conditions changed drastically late in the U.S. trading session on geopolitical concerns involving North Korea.

Early in the session, the dollar was supported by a report that showed U.S. job openings surged to a record high in June. According to the Labor Department, job openings, a measure of labor demand, increased 461,000 to a seasonally adjusted 6.2 million, the highest level since the series started in December 2000.

Later, investors began selling risky assets and moving the money into safe haven assets like the Japanese Yen and gold. The catalyst behind the selling pressure was a report in the Washington Post that said North Korea had successfully created a miniaturized nuclear weapon designed to fit inside its missiles. The selling in the stock market weakened further after President Donald Trump issued a warning to North Korea, saying that its threats will be “met with fire and fury.”

Forecast

I don’t think it’s going to be business as usual on Wednesday because of the overhang from the possibility of an escalation of the tension between the United States and North Korea.

Traders will be watching the stock market and Treasury yields. If investors continue to shed risky assets then the money coming out of the stock market is going to have to go somewhere. If it goes into Treasury Bonds then interest rates will fall. This is because bond prices and yields have an inverted relationship.

If stocks fall then the Yen will benefit from the carry trade. If yields fall then the spread between U.S. Government Bonds and Japanese Government Bonds will tighten, making the Yen a more desirable investment.

So at this point all we can say is that investor aversion to risk will determine the direction of the USD/JPY today.