USD/JPY Fundamental Daily Forecast – Continued Pressure from Falling Treasury Yields

The Dollar/Yen is trading lower on Tuesday after a soft, holiday-driven trade the previous session. Although there weren’t any major U.S.-China incidents over the long week-end to rattle investors and whet their appetite for safe-haven protection, Treasury yields are moving lower once again. This is helping to tighten the spread between U.S. Government bond yields and Japanese Government bond yields, making the U.S. Dollar a less-attractive investment.

At 07:58 GMT, the USD/JPY is trading 109.411, down 0.0117 or -0.11%.

Traders aren’t worried too much about the trade dispute today, per se, but rather its effect on the U.S. economy. Treasury yields are falling because investors are betting that a weakening U.S. economy will force the Fed to cut interest rates later this year. This couldn’t have been more evident than the May 23 plunge in yields and the USD/JPY in reaction to weaker than expected U.S. manufacturer PMI data.

Going forward, the Dollar/Yen is going to become more and more sensitive to U.S. economic report especially on growth, the labor market and inflation. Any weakness in those three should trigger further weakness in the Treasury yields. This should in turn weaken the U.S. Dollar.

Despite what the markets are tell us, the Fed is going to have to come on board with the Treasury investors. Last week, the Fed minutes still sounded a little hawkish as policymakers told investors to remain “patient” and that rates could stay the same for “some time”.

It seems the economic data is going to have to come in drastically weaker to convince the Fed to cut rates. They seem to be focused on labor and inflation so you should be two. Cracks could start to appear as early as June 7 when the U.S. releases its non-farm payrolls report for May.

In Other News

President Trump’s trip to Japan ended with no major trade deal being reached. This was not a surprise since the trip seemed to focus more on pomp and circumstance than resolving deep issues on trade.

Japan’s Prime Minister Shinzo Abe knows how to play Trump and he delivered. He made Trump the center of attention throughout the trip by letting him speak to business leaders, sit front and center at a Sumo wrestling match and even meet the emperor. Furthermore, they both ate hamburgers and played golf. The meat on the hamburger was probably Kobe beer and Abe likely let Trump win the round of golf.

But reach a trade agreement at this time?  That wasn’t in the cards. At times, the Trump seemed to have been somewhere else, saying he’s aiming to reach a trade deal after Japan’s July elections, while Japanese officials said there was no such talk.

Bank of Japan Core CPI came in at 0.7%, higher than the 0.5% previous read. There was no reaction in the markets.

Later today, investors will get the opportunity to react to U.S. reports on Home Price Index, S&P/CS Composite-20 HPI and Consumer Confidence. Keep an eye on the consumer confidence report. It’s one of the Fed’s favorites. Traders are looking for a reading of 130.1, up from 129.2. This report from the Conference Board could shake up the markets if it comes in lower than expected. We get a chance to see if the escalation of tensions between the U.S. and China has spread to the consumer.

Published by

James Hyerczyk

James A. Hyerczyk has worked as a fundamental and technical financial market analyst since 1982. His technical work features the pattern, price and time analysis techniques of W.D. Gann.