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USD/JPY Fundamental Daily Forecast – Pressured by Lower Treasury Yields, Drop in Risk Appetite

James Hyerczyk

The Dollar/Yen is trading lower as concerns over the impact of the coronavirus on China’s economy and the global supply chain are driving investors to seek protection in the Japanese Yen. There wasn’t any fresh economic data released on Tuesday, but a production warning from Apple highlighted the mounting economic costs of the coronavirus and spooked global stock market investors.

At 10:54 GMT, the USD/JPY is trading 109.720, down 0.169 or -0.16%.

Bearish News from Apple, HSBC and Reserve Bank of Australia Supporting Safe-Haven Buying

A drop in demand for risky assets came as Apple said it was unlikely to meet a sales target set just three weeks ago amid lost production and weakening demand in China from the coronavirus outbreak.

The Apple news drove down global equity markets, while safe-haven Treasury bonds rose, driving interest rates lower. The decline in rates helped make the U.S. Dollar a less-attractive asset against the Japanese Yen since it tightened the spread between U.S. Government bond yields and Japanese Government bond yields.

In other bearish news, driving up demand for the safe-haven Japanese Yen, Europe’s largest bank, HSBC, reported a 33% fall in 2019 pre-tax profit to $13.35 billion after it took a goodwill impairment of $7.3 billion. The write down was related to its European investment banking and commercial banking businesses, HSBC said. It also warned that the ongoing coronavirus outbreak could pressure its business in Asia.

Another blow to investor demand for risk were minutes of the last Reserve Bank of Australia (RBA) policy meeting, which showed the board discussed a rate cut and also considered the virus a “material” threat to the economies of China and Australia.

Daily Forecast

The drop in global equity markets in Asia and Europe is likely to keep a lid on the USD/JPY on Tuesday. The selling could accelerate if U.S. markets continue to weaken during their trading session.

The blue chip Dow Jones Industrial Average is expected to open lower based on the early futures market trade. The market is being initially pressured by a plunge in shares of Apple. Another Dow component, Walmart, is also expected to be under some pressure after reporting earnings that fell short of Wall Street expectations.

On the data front, Dollar/Yen investors are likely to be influenced by Empire State manufacturing figures for February and the National Association of Home Builders (NAHB) survey for February.

The USD/JPY will be primarily guided by the direction of U.S. Treasury yields since they impact the interest rate differential between U.S. Government bonds and Japanese Government bonds.

The benchmark 10-year Treasury note yield fell to 1.5457%, while the yield on the 30-year Treasury bond was also lower at around 1.9944%.

The 3-month Treasury yield remains inverted against the 1-year, 2-year, 5-year and 10-year Treasury yields. These are early indications that investors are preparing for a recession.

This article was originally posted on FX Empire