USD/JPY Fundamental Daily Forecast – Traders Shifting Focus to U.S. Tax Reform, Trump’s Fed Chair Appointee

The Dollar/Yen surged to its highest level since July 11 early Monday, as investors reacted positively to the re-election of Japanese Prime Minister Shinzo Abe. According to media reports, Abe’s ruling bloc scored a big victory in Sunday’s election, with his Liberal Democratic Party-led (LDP) coalition winning a combined 312 seats, keeping its two-thirds “super majority” in the lower house.

At 0923, the USDJPY is trading 113.812, up 0.319 or +0.29%.

Essentially, the U.S. Dollar is picking up strength against the Japanese Yen because of the divergence in monetary policy between the U.S. Federal Reserve and the Bank of Japan. Simply stated, the Fed is tightening and the BOJ is still easing monetary policy.

The win for Japan’s ruling policy means we will see a continuation of the ultra-loose “Abenomics” policy that has kept downward pressure on the yen.

According to CNBC, Abe’s victory eased fears that the economic steps implemented under his leadership, including an expansive asset-purchase program by the Bank of Japan, would be disrupted and would halt the yen’s depreciation against the dollar.

In other news, late last week, the USD/JPY surged after the U.S. Senate approved a budget blueprint for the 2018 fiscal year, clearing a critical hurdle for Republicans to pursue a tax-cut package without Democratic support.

Forecast

There were no major economic reports from Japan early Monday and there are no major reports due from the U.S. Therefore, the election results could continue to drive the price action, although we suspect that the outcome was already priced into the market last week. What we are looking at today is just a knee-jerk to the actual results and some late speculative-buying.

With the election in the books, traders are going to shift most of their focus this week on the U.S. tax reform debate and who U.S. President Trump would appoint as the next Federal Reserve chief.

Positive movement towards tax reform and speculation that Trump’s Fed Chair appointee will be hawkish should continue to underpin the USD/JPY and drive it towards the next upside target at 114.492.

Any negative issues with tax reform or rumors that Trump will nominate a dovish candidate for Fed Chair could lead to profit-taking and perhaps a short-term setback in the rally.