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The Dollar/Yen is inching lower on Thursday after giving up earlier gains. The price action suggests investors should be watching out for heightened volatility due to a flip-flop in investor sentiment.
The Forex pair was supported shortly after the opening as sentiment jumped in reaction to the easing of some COVID restrictions in Shanghai, but turned lower amid renewed weakness in the global equity markets.
At 07:39 GMT, the USD/JPY is trading 128.040, down 0.195 or -0.15%. This is down from the intraday high at 128.945. On Wednesday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $73.04, up $0.68 or +0.94%.
Essentially, the Japanese Yen could wear two-hats on Thursday. Rising risk sentiment and U.S. Treasury yields will help support the Dollar/Yen, while weaker demand for risky assets combined with aggressive U.S. Treasury bond buying will support the Japanese Yen.
Easing of COVID Restrictions Could Improve Risk Sentiment
China’s easing of COVID restrictions could improve risk sentiment like we saw earlier in the session. This would hold U.S. Treasury yields steady or move them higher, helping to support the USD/JPY.
The COVID-19-hit financial hub of Shanghai will start to allow more businesses in zero-COVID areas to resume normal operations from the beginning of June, a deputy mayor said on Thursday as the city looks forward to the end of lockdown.
Shanghai, fighting China’s biggest ever coronavirus outbreak, has been steadily allowing more businesses to reopen and letting larger numbers of residents leave their homes for the first time in nearly seven weeks.
The city was “striving to achieve a full resumption of work and production as soon as possible”, deputy mayor Zhang Wei told a media briefing.
Dollar/Yen Turns Lower as Risk Sentiment Dives Overnight
The USD/JPY is under pressure as U.S. stock futures erased earlier gains. This brought enough fear into the market to drive investors into the safe-haven U.S. Treasurys. When investors buy bonds for safety, they effectively drive yields lower. When Treasury yields fall, it tightens the spread between U.S. Government bonds and Japanese Government bonds, making the Japanese Yen a more attractive asset.
You can say that safe-haven buying is driving the Japanese Yen higher, but the movement in the currency starts with the price action in U.S. Treasuries.
Daily Forecast
The direction of the USD/JPY on Thursday will be dictated by risk sentiment. A ‘risk-off’ session will drive the Forex pair lower. A ‘risk-on’ session will provide support from the Dollar/Yen.