USD/JPY Fundamental Daily Forecast – Risk On Scenario Bullish, Risk Off Scenario is Bearish

The Dollar/Yen is trading steady to lower early Friday, pressured by renewed investor concerns over President Trump’s ability to run the government and to push through tax reform and increased infrastructure legislation.

At 0544 GMT, the USD/JPY is trading 109.382, down 0.166 or -0.14%. On Thursday, the Forex pair closed at 109.557, down 0.626 or -0.57%.

Yesterday’s weakness was fueled by a number of events, but the main focus was lower U.S. Treasury yields. This news tightened the spread between U.S. Government Bonds and Japanese Government Bonds, making the Japanese Yen a more attractive investment.

U.S. Treasury prices were higher on Thursday, boosted by concerns over the fallout from the political turmoil in Washington, geopolitical worries and a dovish interest rate outlook from the U.S. Federal Reserve.

The yield on the benchmark 10-year Treasury Note fell to 2.194 percent, while the yield on the 30-year Treasury Bond was also lower at 2.781 percent.

In other news, the number of American filing for weekly unemployment benefits fell to near a six-month low last week. The weekly initial claims report showed a drop to 232,000 versus an estimate of 240,000.

The U.S. Federal Reserve also said factory production dropped 0.1 percent last month. Overall industrial production rose 0.2 percent versus expectations of 0.3 percent.

The Philly Fed Manufacturing Index came in at 18.9, slightly above the 18.3 forecast. Capacity Utilization was 76.7%, unchanged. The Conference Board’s Leading Index was 0.3, equaling the forecast.

Dallas Federal Reserve President and Federal Open Market Committee Member Robert Kaplan called for patience on another rate hike, saying he’d like to see more progress on inflation moving to its 2% target.

He did, however, agree with the Fed’s decision to begin trimming its massive $4.5 trillion balance sheet in the near future, which many analysts feel means in September.

Forecast

In the absence of major economic news from the U.S. and Japan on Friday, the direction of the USD/JPY will once again be influenced by the direction of U.S. Treasury yields. A rise in yields will be supportive for the Dollar/Yen while another drop in rates will be bearish.

The catalyst behind the movement in Treasury yields and consequently the USD/JPY will be the U.S. stock market. Increased demand for higher risk assets will be bullish for stocks and likely pressure the Japanese Yen because of the carry trade.

If risk is off today then look for stocks to fall, Treasury yields to decline and the USD/JPY to weaken.