USD/JPY Fundamental Daily Forecast – Yield Differential Driving the Dollar/Yen Direction

The Dollar/Yen is under pressure early Thursday, erasing some of the gains from last week’s rally fueled by the Fed rate hike and expectations for an additional rate hike later in the year. The catalyst behind the weakness is falling U.S. Treasury yields and slightly lower demand for other higher-yielding assets.

Risk aversion arising out of the steep decline in oil prices is one of the factors weighing on the Dollar/Yen.

The primary driver of the rally seems to be the flattening of the longer-dated U.S. Treasury curve. Treasury prices were mostly lower on Wednesday as investors reacted to the housing data and another plunge in oil prices.

The yield on the benchmark 10-year Treasury note was 2.153 percent, while the yield on the 30-year Treasury bond was slightly lower at 2.72 percent.

The current narrowing of the U.S. – Japan 10-year yield differential, was also weighing on the Greenback.

The U.S. 10-year note yield is now 209 basis points above its Japanese counterpart, compared to levels around 237 basis points seen in the early part of May.

Forecast

Yield differentials should continue to drive the USD/JPY direction.

The drop in crude oil is also having an effect on the Dollar/Yen. Not only is it reducing the odds of inflation making a recovery, but it is also dragging down the S&P 500 Index and Dow Jones Industrial Average.

On Thursday, investors will get the opportunity to react to Weekly Unemployment Claims, the Home Price Index and the Conference Board’s Leading Index. FOMC Member Jerome Powell is also scheduled to speak.

The unemployment claims report is expected to come in at 241K, slightly above the previous 237K. The HPI report is expected to show a rise of 0.4%, down slightly from 0.6%. The CB Leading Index should show a rise of 0.4%, up slightly from 0.3%.

FOMC Member Powell may make comments about inflation that affect the U.S. Dollar. If the dollar falls then this should be bearish for the USD/JPY.