USD/JPY Fundamental Daily Forecast – Rising Yields, Demand for Risk Drive Dollar/Yen Sharply Higher

The USD/JPY rallied to his highest level since May 16 on Monday before stopping at a major 50% retracement level. However, the momentum on the close suggests there is still enough buying power to drive this market into the next main top at 114.367 and the 61.8% retracement level at 114.633.

The Dollar/Yen was bolstered by higher U.S. bond yields and data that showed manufacturing activity climbed to its strongest level in nearly three years.

A sharp rise in U.S. equity markets signaled increased demand for higher risk assets. This helped reduce demand for the lower-yielding Japanese Yen.

The USD/JPY firmed as the interest rate differential between U.S. Treasury Bonds and Japanese Government Bonds widened, making the U.S. Dollar a more desirable investment.

U.S. Treasury yields rose as investors reacted to a fresh batch of economic data. The yield on the benchmark 10-year Treasury Note rose to 2.35 percent, while the yield on the 30-year Treasury Bond rose to 2.865 percent. The two-year Treasury Note yield reached its highest level since 2009, finishing at 1.414 percent.

The divergence between the monetary policies of the U.S. Federal Reserve and the Bank of Japan continued to support a higher USD/JPY. Monday’s rise in Treasury yields was underpinned by upbeat U.S. economic data.

The HIS Markit’s PMI fell to 52.0 in June, down from 52.7 in May as new order growth eased for the fifth month running. Traders didn’t seem to mind because it remained above the key 50 level.

The ISM Manufacturing Index for June came in higher than anticipated 57.8, beating expectations of 54.9. Construction Spending was forecast to have grown 0.2 percentage points in May, after falling by 1.4 percentage points in April.

U.S. equities began the new quarter with a spike to the upside. The Dow Jones Industrial Average hit a record high before closing about 130 points higher. Money continued to flow out of technology and into financial stocks. The increased demand for risk also underpinned the Dollar/Yen.

The U.S. markets are closed today so volume is expected to come in below average. This could lead to a choppy, two-sided trade.