USD/JPY Fundamental Daily Forecast – Strong Risk Sentiment Favors Higher-Yielding U.S. Dollar

The Dollar/Yen was lifted on Thursday by a combination of carry trade buying and safe-haven liquidation of the Japanese Yen. Strong U.S. economic data also underpinned the greenback.

Central bank policy divergence remained the major force driving the Forex pair higher with the hawkish Federal Reserve likely to lead to the widening of the spread between U.S. Government bond yields and Japanese Government bond yields.

On Thursday, the USD/JPY settled at 114.417, up 0.300 or +0.26%. The Invesco CurrencyShares Japanese Yen Trust ETF finished at $81.96, down $0.27 or -0.33%.

Strong Demand for Riskier Assets Refuels Carry Trade

Stock markets in the United States, Asia and Europe posted solid gains while the safe-haven Japanese Yen eased on signs the Omicron variant would not significantly derail global economic growth. The new clarity in the market helped revive the carry trade, a strategy whereby investors borrow in Japanese Yen and buying stocks in U.S. Dollars

After taking a nearly no-interest loan in Yen, traders sell the currency and buy U.S. Dollars to invest in U.S. equity markets.

US Data Shows Stable Economy

Thursday’s slew of economic reports showed a stable economy with improving labor and spending trends, but inflation at high levels.

Jobless claims for the week ended December 18 came in roughly as expected at 205,000.

Durable goods for November rose 2.5%, compared to the 1.5% Dow Jones estimate.

Personal income and spending showed increases for November.

But high inflation remained an issue. The Federal Reserve’s closely watched core personal consumption expenditures index (PCE) rose 0.6% in November from the month prior. Core PCE rose 4.7% year-over-year in November, higher than the 4.5% rate expected.

Central Bank Divergence Favors U.S. Dollar

The U.S. Federal Reserve said last week it would accelerate tapering of its massive bond buying program and paved the way for three interest rate hikes in 2022, but this did not roil markets as it did in 2013 when the Fed tapered its post financial crisis quantitative easing.

Meanwhile, earlier in the week, Bank of Japan Governor Haruhiko Kuroda said on Monday it was too early to consider normalizing monetary policy, bolstering the view that the Japanese central bank would lag behind other central banks in dialing back monetary stimulus.

Advantage: U.S. Dollar over Japanese Yen.