USD/JPY Fundamental Daily Forecast – Rising U.S. Equity Markets Could Limit Losses

The Dollar/Yen is trading flat early Monday. Traders seem to be taking some time today to reassess last week’s price action before moving forward. Some may feel that sellers overcooked the Dollar to the downside, others may feel the Forex pair has more downside potential.

At 0737, the USD/JPY is trading 112.579, up 0.064 or +0.05%.

The price action today is going to continue to be influenced by the direction of U.S. Treasury yields. Rising Treasury yields will widen the spread between U.S. Government Bonds and Japanese Government Bonds (JGB’s). This will be bullish for the USD/JPY.

If the interest rate differential continues to tighten then look for weakness in the USD/JPY.

The spread has been tightening since last Tuesday after a chain of emails from President Trump’s son raised issues about his involvement with Russia in influencing the U.S. election. The spread tightened further after Fed Chair Yellen expressed concerns over inflation and its influence on Fed policy and after the release of disappointing data on consumer inflation and retail sales lowered the chances of a Fed rate hike later this year.

Forecast

Traders should continue to monitor the interest rate differential today. It could continue to tighten as investors continue to digest last week’s activity. The new data today is the Empire State Manufacturing Index. It is expected to come in at 15.2, down from 19.8. A better number may provide some support for the USD/JPY. Missing the estimate to the downside is likely to be bearish for the USD/JPY.

Although a tighter interest rate differential will pressure the Dollar/Yen, losses could be limited by rising U.S. equity prices because of the carry trade. U.S. stocks are expected to continue to find support from strong earnings. This may encourage investors to sell the Yen to finance new long positions in the U.S. equity markets.

Japan is on bank holiday today so volume may be light. Additionally, investors may already be preparing for Thursday’s Japanese Trade Balance report and the Bank of Japan’s monetary policy statement.

The BOJ is widely expected to leave interest rates unchanged, but may offer guidance in its Outlook Report and at its press conference. BOJ officials demonstrated last week that they are sticking with policy when they started to buy JGB’s in order to hold interest rates lower. They may offer their opinion on rising global interest rates and how they affect BOJ policy.