The Dollar/Yen rebounded slightly on Monday in reaction to mixed U.S. equity markets and marginally higher U.S. Treasury yields.
The USD/JPY settled at 112.620, up 0.107 or +0.10%.
Increased demand for higher-yielding assets is helping to revive the carry trade. This means stock market investors are borrowing from Japanese banks then selling the Japanese Yen to finance U.S. stock positions. According to the latest data from the Commodity Futures Trading Commission, Japanese Yen short positions are at their highest level since June 2015.
U.S. government debt prices were slightly lower on Monday, which means yields rose, as investors shifted their focus on upcoming data releases and auctions.
The yield on the benchmark 10-year Treasury Note was slightly higher at 2.303 percent, while the yield on the 30-year Treasury Bond settle around 2.887.
In the U.S. on Monday, the Empire State Manufacturing Index posted a lower-than-expected 9.8. This was well-below the 15.2 forecast and the 19.8 previous reading.
Volume was light on Monday because of a Japanese bank holiday.
Forecast
The direction of the USD/JPY on Tuesday is going to be determined once again by the spread between U.S. Government Bond yields and Japanese Government Bonds (JGB’s). Higher U.S. Treasury yields will widen the interest rate differential, making the U.S. Dollar a more attractive investment.
Lower U.S. Treasury yields will create demand for the Japanese Yen. However, the Yen’s gains will be limited by rising U.S. equity markets due to the carry trade.
Traders will return from a bank holiday on Tuesday but volume may continue to come in below average due to position-squaring ahead of the Bank of Japan’s monetary policy announcement later in the week.
On Tuesday, investors will get the opportunity to react to the latest data on Import Prices. The report is expected to come in at -0.2%.
The NAHB Housing Market Index is expected to come in unchanged at 67.
Late in the session, the TIC Long-Term Purchases report is expected to come in at 20.3 billion. Well above the 1.8 billion from last month.
The biggest influence on the Japanese Yen on Tuesday could be the U.S. stock market. Earnings season is about to heat up and investors are banking on strong numbers. This could lead to a sharp rise in stocks, limiting losses in the Dollar/Yen Forex pair due to the carry trade.
This article was originally posted on FX Empire