Yahoo Finance USD/JPY Fundamental Daily Forecast – Widening Interest Rate Differential Making Dollar More Attractive
The Dollar/Yen is trading higher for a second session early Thursday. The dollar is being supported by higher long-term U.S. Treasury yields and increased demand for higher risk assets. The price action suggests investors are watching and reacting to the widening yield differentials.
At 0308 GMT, the USD/JPY is trading 107.402, up 0.184 or +0.17%.
Despite the attractive interest rate differential, which makes the dollar more attractive, traders are saying greenback bulls haven’t been able to take advantage of the situation due to lingering concerns over President Trump’s ability to lead the nation.
The so-called “Trump Risk” is the broad uncertainty stemming from U.S. President Donald Trump’s trade and economic policies, as well as geopolitical posturing in the Middle East and elsewhere. One example is the U.S.-China tariff standoff which has heightened volatility in financial markets over the past month.
In other news, the Japanese Yen showed little response to the U.S.-Japan summit, at which Trump and Japanese Prime Minister Shinzo Abe agreed to intensify trade consultations between the two longtime allies.
Forecast
Investors should continue to watch the interest rate differential between U.S. Government Bonds and Japanese Government Bonds (JGBs). Dollar traders, particularly against the Yen, have been trying to re-establish the correlation with widening yield differentials this month.
A widening of the spread due to rising U.S. interest rates should make the U.S. Dollar a more attractive investment. The dollar should rise on this news unless Trump does something to increase risk levels.
Traders should also continue to monitor the strength in U.S. equity markets. Increased demand for risky assets this week has not helped boost demand for the USD/JPY, but this may have been because of the Abe-Trump meeting. Now that the meeting has ended favorably, the correlation between rising stocks and a weaker Japanese Yen could be renewed.
At this time, the USD/JPY is rangebound between 107.774 and 106.878. If stocks continue to rise along with the differential between U.S. Government Bonds and Japanese Government Bonds then USD/JPY buyers may take a run at the top of the range.
Economic uncertainty, which could lead to lower rates, along with a break in stocks, could lead to a retest of 106.878.
This article was originally posted on FX Empire
