USD/JPY Fundamental Daily Forecast – Taking out 107.856 Could Trigger Steep Sell-off

The Dollar/Yen dropped to a four-month low early Tuesday as investors responded to the news that North Korea fired a missile over Japan. The Greenback opened the session under pressure in reaction to Fed Chair Janet Yellen’s Jackson Hole speech on Friday that made no mention of monetary policy.

At 0917 GMT, the USD/JPY is trading 108.449, down 0.794 or -0.72%. This puts the Forex pair in a position to challenge a major bottom from April at 108.122 and a key technical level at 107.856. This level is the potential trigger point for an acceleration to the downside.

Forecast

If U.S. Treasury yields continue to weaken then the Japanese Yen will remain a more attractive asset than the U.S. Dollar. If stock market investors continue to shed risky assets then this will also drive up demand for the Japanese Yen because of the carry trade.

The biggest drop in the USD/JPY could occur if Japanese Yen investors decide to repatriate funds if the market turmoil persists and dampens their risk appetite.

While we can’t predict the events, we do think investors will continue to react the same way to geopolitical risks. We’re now playing a waiting game with North Korea. The U.S. could press for more sanctions. South Korea and the U.S. could increase war game activity. Russia and China could reopen talks to calm down North Korea. We’ve seen it all before.

The U.N. is likely to condemn the missile launch. The U.S. is likely to push for more sanctions and South Korea and Japan may begin preparing for the worst. There is no right answer so investors will continue to repeat the drills designed to preserve capital.

Although the USD/JPY is approaching major support, investors aren’t just going to buy the Forex pair for this reason only. With U.S. interest rates likely to remain under pressure and investors shedding risky assets, money is likely to continue to pour into the safe haven Japanese Yen.

I think the USD/JPY is a lot closer to a steep sell-off then it is a meaningful short-covering rally.