USD/JPY Fundamental Analysis – Forecast for the Week of January 23, 2017

The Dollar/Yen posted a two-sided trade before rebounding and closing slightly higher last week as the Forex pair reacted mostly to increased demand for risky assets and risk aversion. The Forex pair was pressured early in the week amid concerns over the U.K.’s exit from the European Union.

Solid U.S. economic data, led by a strong consumer inflation number helped support the dollar. Monthly CPI was 0.3%, putting the annualized amount at 2.1%. This put it above the Fed’s 2.0% mandate for the first time since the summer of 2014.

Donald Trump helped pressure the Dollar/Yen when he said he thought the U.S. was losing its trade competitiveness because the dollar was “too strong”.

Fed Chair Janet Yellen helped support the dollar against the Yen when she said she can see multiple rate hikes in the future, but she followed up this comment the next day with less hawkish comments about the Fed taking a cautious approach.

The three major U.S. equity markets finished lower for the week, fueling the carry trade which increased demand for the Japanese Yen.

The USD/JPY ended the week at 114.533, up 0.080 or +0.07%.

Forecast

There are no major reports from Japan and data is limited in the U.S. so USD/JPY investors are likely to continue to react to Trump and the direction and volatility in the U.S. stock markets.

Although investors typically give a President the first 100 days in office the time to get established, investors seem more anxious at this time and may show little patience with Trump. This could weaken equities, sending investors into the safety of the Japanese Yen.

In U.S. economic news, Weekly Unemployment Claims are expected to come in at 247K. Advance GDP is expected to show growth of 2.1% versus the previous 3.5%. Finally, the week ends with a report on Core Durable Goods Orders. It is expected to come in at 0.5%.

Given the scarcity of reports this week, we expect investors to follow the headlines. This could prove to be difficult and risky, which is why we are likely to see a volatile, two-sided trade this week. Setting the news aside this week essentially means Dollar/Yen investors are likely to react to the direction and volatility of U.S. equity markets. They will tell us if it will be a risk on, or risk off market this week.

Risk on means investors will sell the Japanese Yen. A risk-off trade will likely trigger a rally in the Yen.