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USD/JPY Fundamental Daily Forecast – Still Bullish but Vulnerable to Safe-Haven Buying

The Dollar/Yen is recovering nicely early Tuesday following yesterday’s potentially bearish closing price reversal top. The price action suggests that Monday’s price action was just a knee-jerk reaction to a surprise reversal in the stock market.

On Monday, the USD/JPY settled at 113.428, down 0.067 or -0.06%.

At 0935 GMT, the Dollar/Yen is trading 113.680, up 0.252 or +0.22%.

The USD/JPY rallied early Monday after Japanese incumbent Prime Minister Shinzo Abe and his Liberal Democratic Party secured a major victory at the polls. This meant the Bank of Japan would continue with its loose monetary policy with the blessing of the administration.

Late Monday, the USD/JPY reversed course to finish lower for the session. The sell-off was fueled by a combination of profit-taking and carry trade selling. The profit-taking was basically triggered by a “buy the rumor, sell the fact situation” because of the election.

The carry trade selling was related to the sharp break in the U.S. stock market. Investors sold stock and used some of the profits to pay back loans to Japanese banks. In order to do this, they had to sell U.S. Dollars and buy Japanese Yen.

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Daily USDJPY

Forecast

There has been no follow-through to the downside following Monday’s steep break. This indicates that the previous day’s price action was only a reaction and not the start of a change in trend.

The USD/JPY is likely to continue to remain supported as long as U.S. Treasury yields continue to rise along with appetite for risky assets.

Essentially, the USD/JPY is being supported by the widening of the spread between U.S. Government Bonds and Japanese Government Bonds. This widening interest rate differential should continue to make the U.S. Dollar a more attractive investment than the Japanese Yen.

We’re looking for the USD/JPY to continue to rise over the near-term. However, as we saw on Monday, the rally is vulnerable to fast shifts in direction. The Dollar/Yen remains most susceptible to safe haven buying. A sudden sell-off in the stock market is one factor that could stop the Forex pair rally, for example. This could be triggered by an event related to North Korea, or the failure of the Trump Administration to reform taxes.

This article was originally posted on FX Empire

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