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USD/JPY Fundamental Daily Forecast – Driven Lower by Spike in Risk Aversion

James Hyerczyk
The direction of the USD/JPY this week will likely be determined by the movement of Treasury yields and the stock market. These two factors will be influenced by a number of U.S. economic reports and U.S. China relations.

The Dollar/Yen is trading lower early Thursday in reaction to a steep drop in U.S. equity prices. With risk off, the Japanese Yen has become an attractive safe-haven asset. The Forex pair is still trading above Tuesday’s low, but if the downside momentum continues, it could easily reach the November 20 main bottom at 112.305. Taking out this level will reaffirm the downtrend and could even extend the move into a major technical retracement area at 112.175 to 111.607.

At 0437 GMT, the USD/JPY is trading 112.650, down 0.537 or -0.48%.

The spike in risk aversion is being fueled by concerns about U.S. economic growth. These worries started to become an issue on Monday after an inversion in a part of the U.S. Treasury yield curve. This started when the three-year Treasury note surpassed its five-year counterpart.

The short-term rate rising above the long-term rate is known as a yield curve inversion. It is often seen as a recession signal although the timing of the economic weakness can’t be predicted. Sometimes it takes years for the economy to contract for two consecutive quarters which is the classic definition of a recession. Many traders say that one can’t call the Treasury market inverted until the 3-month Treasury bill yield or the Two-year Treasury note yield rises above the 10-year yield.

The spread between the two-year and five-year Treasury yields also inverted, while the two-year/10-year spread reached its flattest level in more than a decade amid a sharp fall in long-term rates.

Forecast

Continued weakness in the U.S. equity markets coupled with a tightening of the spread between the two-year Treasury note and the 10-year Treasury note should continue to send investors into the safety of the Japanese Yen.

Furthermore, the dollar could remain under pressure until the Federal Open Market Committee (FOMC) makes its next interest rate decision following its December 18-19 meeting. The Fed is widely expected to raise its benchmark interest rate 25 basis points at this meeting. However, the focus for investors will be on how many rate hikes the central bank will project for 2019.

The inversion in yields will also make Treasurys and consequently the U.S. Dollar more sensitive to economic data, especially weaker-than-expected reports.

The price action in the USD/JPY could be especially volatile due to a mountain of U.S. information early Thursday including Challenger Job Cuts, ADP Non-Farm Employment Change, Revised Nonfarm Productivity, Revised Unit Labor Costs, Trade Balance and Weekly Unemployment Claims.

At 1445 GMT, traders will get the opportunity to react to Final Services PMI. At 1500, the major report will be released. ISM Non-Manufacturing PMI is expected to come in at 59.1, down slightly from 60.3. Factor Order are also due to be released to this time.

Also on tap are speeches by FOMC Members Bostic and Williams. The day ends with a speech by Fed Chair Jerome Powell at 2345 GMT.

This article was originally posted on FX Empire

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