USD/JPY Fundamental Daily Forecast – Expecting Low Volume, Two-Sided Trade

The Dollar/Yen is trading lower early Monday after setting a one-month low of 111.879 earlier in the session. Investors showed almost no reaction to better-than-expected domestic data and a key geopolitical event.

At 0945 GMT, the USD/JPY is trading 112.113, up 0.55 or +0.05%.

The range is tight and volume is low as the holiday-shortened week begins in the U.S. Thursday is a U.S. bank holiday which likely means investors will start cutting back on trading on Wednesday and probably take Friday off as well.

The story of the day pertains to the Euro. It hit a two-month low against the Japanese Yen on Monday, as German Chancellor Angela Merkel’s efforts to form a three-way coalition government failed stoking political uncertainty in the Euro Zone’s largest economy.

Asia stock markets traded mixed on Monday, following a decline in U.S. equities last Friday on lingering concerns about American tax reform.

European stock markets are trading flat to lower on Monday morning, with any gains, being capped by political instability in Germany.

The benchmark December E-mini S&P 500 Index futures contract is trading lower during the pre-market session.

In other news, Japan’s Trade Balance came in better-than-expected at 0.32 Trillion, beating the 0.21 Trillion estimate and outperforming the previous 0.27 Trillion read. Additionally, Japan’s exports grew by double digits for a fourth straight month in October, continuing the best year-to-date performance since the global financial crisis.

The value of exports rose 14 percent from a year ago earlier. Imports increased 18.9 percent. Both came in below expectations, however. Traders were looking for a rise of 15.7 percent and 20.2% respectively.

Forecast

Technical factors may be playing a role due to oversold conditions early Monday. Thin pre-holiday volume may even trigger a counter-trend rally.

The main focus, however, is likely to remain on U.S. tax reform and the Mueller probe. Both of which could trigger a sell-off in the U.S. equity markets which could lead to a flight to safety rally into the Japanese Yen.

We don’t expect much on tax reform or any fresh revelations in the Mueller probe, however, due to the holiday. The key players are likely to pick up these two issues next week. Therefore, the direction of the USD/JPY today is likely to be controlled by the three usual factors, the direction of Treasury yields, the direction of the U.S. Dollar and appetite for risk.

We’re already seeing a two-sided trade. This tone could continue throughout the session.