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USD/JPY Fundamental Daily Forecast – Turns Lower on Upbeat Comments from BOJ’s Kuroda, Lower U.S. Yields

James Hyerczyk

The Dollar/Yen is trading lower on Monday after giving up earlier gains. The Forex pair rallied early in the session in reaction to hawkish comments from a key Fed official. However, the rally stopped and the market turned lower after a Bank of Japan made upbeat comments about the economy. Traders could also be reacting to lower U.S. Treasury yields and renewed concerns over U.S. tax reform.

At 1246 GMT, the USD/JPY is trading 113.302, down 0.211 or -0.19%.

Daily USDJPY

Early Monday, Philadelphia Fed President Patrick Harker said, according to Bloomberg, he expects to back an interest rate hike next month despite caution over low-inflation, as U.S. central bank policy needs to be positioned to deal with future economic shocks.

Harker said he has “lightly penciled in” a December rate hike. However, he flagged he had slightly less conviction about the policy decision than he had last month as he “continues to elicit caution” about weak inflation and also about the way in which it is measured.

Harker also added that he expects the Fed to raise rates three times next year as long as inflation remains on track, and the projected tightening could take policy to what he would describe as a neutral stance.

Finally, Harker said, “Removing accommodation is the right next step for a few reasons.” “In the event of another shock to the system, I want our tools to be at their most effective, and in my view, that means reducing our balance sheet.”

Later in the session, Bank of Japan Governor Haruhiko Kuroda said on Monday, according to Bloomberg, that economic growth is gathering momentum and increasing the chances of inflation hitting his 2 percent target, reinforcing market expectations that no additional stimulus is forthcoming.

Kuroda said the central bank was closely watching the economic effects of prolonged ultra-easy policy, particularly the damage it could inflict on financial institutions’ margins.

“The current economic expansion doesn’t rely on specific factors and is supported by various elements. We therefore see the expansion as highly sustainable,” Kuroda said.

“The BOJ is mindful of the risk that its low-interest rate policy, if prolonged, could weigh on financial institutions’ profits,” he added, noting that reduced profits could discourage financial institutions from boosting lending.

The shift in momentum to the downside has put the USD/JPY in a position to resume last week’s sell-off. The move could accelerate if 112.950 is taken out with conviction. This is likely to occur if Treasury yields weaken or if U.S. equity markets sell-off.

The yield on the benchmark 10-year Treasury note and 30-year Bond yield are trading lower as investors look ahead to an auction. The U.S. Treasury is set to auction $42 billion in 13-week bills and $36 billion in 26-week bills.

This article was originally posted on FX Empire

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