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USD/JPY Fundamental Daily Forecast – Price Action Suggests Recession Concerns Being Downplayed

The Dollar/Yen is trading flat on Thursday following yesterday’s reversal of Tuesday’s strong gains. The catalysts behind the sell-off were a plunge Wednesday in the major U.S. stock indexes and a signal in the bond market that flashed a troubling sign about the U.S. economy.

On Wednesday, the benchmark S&P 500 Index settled at 2840.60, down 85.72 or -3.06%. The blue chip Dow Jones Industrial Average finished at 25479.42, down 800.49 or -3.16% and the technology-based NASDAQ Composite ended at 7773.94, down 242.42 or -3.17%. For the Dow, this was its worst percentage drop of the year and fourth-largest point drop of all time.

The troubling sign for the U.S. economy occurred when the yield on the benchmark 10-year Treasury note briefly broke below the 2-year rate, “an odd bond market phenomenon that has been a reliable indicator of economic recessions,” according to CNBC. Investors, worried about the state of the economy, rushed to short-term safe-haven assets like the Japanese Yen and long-term safe-haven assets like the 30-year Treasury bond. Early Thursday, 30-year Treasury yields broke below the 2% floor for the first time, helping to underpin the Yen.

At 06:17 GMT, the USD/JPY is trading 105.935, up 0.021 or +0.02%.

Daily Forecast

While the price action in the USD/JPY seems to be indicating there is plenty of doom and gloom around, and the inverted 2-10 yield curve flashes a recession signal, there are some analysts who aren’t paying too much to the indicator, which may be enough to stabilize the Dollar/Yen over the short-run. Or at least encourage traders from getting too long in the Japanese Yen.

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On Thursday, Viktor Shvets, head of Asian strategy for Macquarie Commodities and Global Markets, brushed off concerns that the inverted yield curve is an accurate predictor of a recession. He told CNBC’s “Squawk Box”, “My view has always been that that yield curve predicts absolutely nothing. What it does tell you is that you will have a recession if you don’t do something about it.”

On Wednesday, former Federal Reserve Chair Janet Yellen told FOX Business she doesn’t think the U.S. economy is headed toward a recession. “I think the answer is most likely no,” Yellen said. “I think the U.S. economy has enough strength to avoid that. But the odds have clearly risen and they are higher than I’m frankly comfortable with.”

Yellen also downplayed the idea that a 2-10-year yield inversion is a sign of a future recession. Yellen said, “So historically, it’s been a pretty good signal of recession, and I think that’s why the markets pay attention to it, but I would really urge on this occasion it may be a less good signal. And the reason for that is that there are a number of factors other than market’s expectations about the future path of interest rates that are pushing down long-term yields.”

The point I am trying to make is that one should be careful blindly shorting the USD/JPY because of the yield curve inversion. Data shows it may take as long as 22 months before an actual recession occurs if at all. Remember also that the Fed has many tools at its disposal to prevent a recession, and if it’s serious about maintaining the economic expansion then it may not be afraid to do whatever it takes to protect and prop up the economy.

This article was originally posted on FX Empire

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