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USD/JPY Fundamental Daily Forecast – Rising Treasury Yields Driving Upside Momentum

The Dollar/Yen is trading higher on Tuesday amid increased demand for higher risk assets and rising U.S. Treasury yields. The strong performance in U.S. equity markets has kicked in the carry trade which is bullish for the dollar and bearish for the yen. This situation has U.S. investors borrowing at nearly 0% in Japan and using the leverage to purchase equities. When this occurs, investors borrow in yen, then sell the currency to buy dollars.

At 0747 GMT, the USD/JPY is trading 111.086, up 0.242 or +0.22%.

The easing of tensions over the trade conflict between the United States and China is also helping to calm fears of a prolonged trade war between the two economic powerhouses. This is causing investors to liquidate their safe haven buys of U.S. Treasuries. By selling their position in Treasurys, investors are driving up yields. Higher yields make the U.S. Dollar a more attractive investment.

Essentially, it’s the divergence between the hawkish monetary policy of the U.S. Federal Reserve and the dovish Bank of Japan that is driving up demand for the USD/JPY. This is leading to the widening of the spread between U.S. Government bond yields and Japanese Government bond yields, once again, making the U.S. Dollar a more attractive asset.

In economic news from Japan, Preliminary Machine Tool Orders came in at 11.4%, down slightly from the previous 14.9%.

In the U.S. on Tuesday, investors will get the opportunity to react to the NFIB Small Business Index and the JOLTS Job Openings reports.

On Tuesday, USD/JPY traders will be paying close attention to U.S. Treasury yields and the stock market. Another rise in yields could launch a rally through the recent top at 111.131. This could trigger a spike into the next two tops at 111.396 and 111.477. Many chart watchers feel that overtaking these two levels could trigger a spike to the upside with the 113.00 area the next major target.

Traders will also be watching the price action and order flow in the U.S. equity markets because increased demand for these risky assets will continue to be supportive for the Dollar/Yen.

This article was originally posted on FX Empire

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