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USD/JPY Fundamental Daily Forecast – Will Investors Respond to Carry Trade or Treasury Yields?

By:
James Hyerczyk
Published: Jul 27, 2017, 06:59 UTC

The Dollar/Yen declined sharply on Wednesday after the U.S. Federal Reserve’s cautiously worded monetary policy statement drove down U.S. Treasury yields.

Japanese Yen

The Dollar/Yen declined sharply on Wednesday after the U.S. Federal Reserve’s cautiously worded monetary policy statement drove down U.S. Treasury yields. In its statement, the Fed acknowledged the soft inflation reading, bolstering views that the central bank may take a pass at additional rate hikes later this year.

The USD/JPY settled at 111.167, down 0.708 or -0.63%.

The Fed also said it expected to start shrinking its massive $4.5 trillion holdings of bonds “relatively soon”, a phrase taken by many to mean it will start the process in September.

USDJPY
Daily USDJPY

Forecast

The direction of the USD/JPY over the near-term is going to be influenced by two factors, Treasury yields and stock market prices. Falling Treasury yields tighten the spread between U.S. Government Bonds and Japanese Government Bonds (JGBs). This tends to make the U.S. Dollar a less-attractive investment, pressuring the Forex pair.

Rising stock prices tend to support the USD/JPY because of the carry trade. When money managers are bullish stocks, they will borrow in Yen from Japanese banks and sell the Yen to invest their dollars received in the stock market.

The question facing USD/JPY investors at this time is which event is controlling the trade?

In my opinion, I think the downside for U.S. Treasury yields is limited and the stock market’s upside is unlimited so I tend to think that the Dollar/Yen is going to start to attract buyers.

The key area to watch is 111.640 to 110.967. I’ll be right on my forecast if buyers can sustain a move over 111.640 and wrong if there is a prolonged move under 110.967.

In other news, later today, investors will get the opportunity to react to the latest U.S. data on Core Durable Goods Orders and Weekly Unemployment Claims.

Core Durable Goods Orders are expected to show a 0.4% increase. Weekly jobless claims are expected to come in at 240K

Minor reports include Durable Goods Orders, Goods Trade Balance and Preliminary Wholesale Inventories.

Durable Goods Orders are expected to rise 3.5%. The Goods Trade Balance is expected to be nearly unchanged at -65.0 billion and Preliminary Wholesale Inventories are expected to rise 0.3%.

Early Friday, Japan will release data on Household Spending, Retail Sales, Unemployment and Consumer Inflation. The Bank of Japan is also expected to release its Summary of Opinions.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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