The Dollar/Yen is trading slightly higher early Tuesday following yesterday’s steep sell-off. With U.S. and Japanese banks closed on Monday due to holidays, speculative sellers were able to drive the Forex pair lower likely due to the absence of a major stopper. They had their reasons, however. Another steep sell-off in U.S. equity markets drove investors to seek shelter in the safe-haven Japanese Yen.
At 0401 GMT, the USD/JPY is trading 113.110, down 0.127 or -0.11%.
A sharp break in global equity markets also drove investors into the safety of the Japanese Yen. This selling was driven by the U.S. Dollar’s strength, a vibrant U.S. economy, rising U.S. interest rates and fears of a global trade war.
Those are the headline reasons. Ultimately, it comes down to the divergence in monetary policies between the hawkish U.S. Federal Reserve and the dovish Bank of Japan. The Fed raised rates 25-basis points two weeks ago while strongly hinting at another rate hike in December, three more in 2019 and at least one more in 2020. Meanwhile, at its last meeting, BOJ policymakers were still debating whether to extend its ultra-dovish monetary policy.
The battle between the Dollar and the Japanese Yen will be at the forefront until the stock market stabilizes. Theoretically, rising U.S. Treasury yields should continue to make the U.S. Dollar a more attractive investment. However, when it comes to protecting risk, the Japanese Yen becomes the more appealing asset.
Furthermore, the Japanese Yen is a carry trade currency. Investors borrow money in Japan at ultra-low rates, sell the Yen to buy the dollar then invest the proceeds into stocks. When stocks sell-off like they have the past three sessions, these same investors dump stocks and take the proceeds to sell the dollar and buy the Japanese Yen to pay back their loans. It is this process that drives the USD/JPY lower.
Since a change in monetary policy is unlikely, the Dollar/Yen is likely to continue to be supported by any widening of the spread between U.S. Government bond yields and Japanese Government bond yields. However, over the short-run, safe-haven buying of the Japanese Yen due to “risk-off” sentiment could continue to drive the USD/JPY lower.
The daily chart shows that the trend has shifted to down as well as momentum. The minimum downside target is a bottom at 112.555, followed by a retracement zone at 112.480 to 111.984.
This article was originally posted on FX Empire
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