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USD/JPY Fundamental Daily Forecast – Trade Deal Worries, Hong Kong Turmoil Driving Investors into Yen

James Hyerczyk

The Dollar/Yen is trading lower on Wednesday as most of the major players remain on the sidelines ahead of U.S. reports on consumer inflation and testimony from Federal Reserve Chairman Jerome Powell.

Today’s early price action is being fueled by a spike lower in U.S. Treasury yields. At the same time, demand for risky assets is relatively flat with stocks hovering just below their record highs.

At 10:06 GMT, the USDJPY is trading 108.909, down 0.122 or -0.11%.

Safe-Haven Buying

The drop in yields may have been triggered by safe-haven buying in response to weaker equity markets in Asia and Europe in response to U.S. President Trump’s threat to “substantially” increase tariffs if China failed to agree to a trade deal.

Additionally, concern is also growing that the intensifying unrest in Hong Kong could prompt a Chinese crackdown, pushing Hong Kong shares 2% lower.

Over the past few weeks, the probability of a trade deal shifted to the positive side. Risks were being taken off the table. Now it looks as if investors are realizing that risk is still there, and they’re taking protection in the Treasury market, tightening the spread between U.S. Government bonds and Japanese Government bonds, while making the Japanese Yen a more attractive asset.

BOJ’s Kuroda Dismisses View Japan’s Policies Linked to MMT

Bank of Japan Governor Haruhiko Kuroda said on Wednesday there is no truth that Japan’s fiscal and monetary policy is linked to “Modern Monetary Theory” (MMT), an idea floated by some U.S. academics to print money unlimitedly to bank-roll government debt for fiscal spending.

“The Bank of Japan buys government bonds to create an appropriate shape for the yield curve and achieve its inflation target,” Kuroda told parliament.

“It’s not true that Japan’s fiscal and monetary policies are guided on the basis touted by MMT,” he said.

Daily Forecast

While most traders will be focusing on risk factors on Wednesday, some will be watching the U.S. inflation data and the testimony from Fed Chair Powell.

The U.S. Labor Department will release its Consumer Price Index (CPI) at 13:30 GMT. It is expected to show U.S. consumer prices rose 0.3% in October in October, and at a 1.7% annual rate. The higher the numbers the better for the U.S. Dollar.

Core CPI, which excludes volatile food and energy prices, are expected to have risen 0.2% in October, after a jump of 0.1% in September. This monthly estimate would be a 2.4% increase since October of last year.

Also on Wednesday, Federal Reserve Chairman Jerome Powell will speak to the Congressional Joint Economic Committee about the current economic outlook, starting at 16:00 GMT. Investors will be looking for additive details on the central bank’s current impression of the health of the economy after the Fed cut rates on October 30 and signaled it was nearing a pause.

Despite the importance of the consumer inflation data and Powell’s testimony, I don’t think USDJPY will be rattled by anything these events show. Inflation is expected to remain tame, and Powell is usually pretty tight-lipped so he’s not expected to shake up the markets.

However, look for USDJPY traders to remain primarily concerned about the lack of progress in U.S.-China trade negotiations. Furthermore, keep an eye on the Treasury yields since their movement is controlling the direction of the Dollar/Yen.

This article was originally posted on FX Empire