USD/JPY Fundamental Forecast – April 21, 2017

The Dollar/Yen closed higher for a second day on Thursday as stocks recovered, driving up demand for higher-yielding assets and as a so-called market-friendly presidential candidate held the lead ahead of Sunday’s first-round election in France.

According to the latest polls, former French finance minister, Emmanuel Macron, remained atop the polls for Sunday’s French vote, but the election is still a four-way battle in the first round on April 23. If Macron comes in first or second in Sunday’s poll, he is seen easily winning the run-off vote on May 7 after remaining candidates are eliminated.

Despite what the polls say, after surprises in last year’s U.S. election and the U.K. Brexit referendum, traders remain concerned that voter indecision and low voter turnout could catch investors on the wrong side of the market again.

The USD/JPY was also supported by higher U.S. Treasury yields as investors waited on the results from the French election. Yields were also supported by technical factors after the 10-year yield failed to break below key resistance at 2.19 percent.

Greater demand for higher risk assets also helped weaken the lower-yielding Japanese Yen. Early in the session, U.S. stocks rose as traders increased bets on a strong earnings reporting season. According to reports, profits at S&P 500 index companies are estimated to have risen 11.1 percent in the first quarter.

Stocks were supported late in the session after Treasury Secretary Steven Mnuchin said the administration was close to “major tax reform.” Mnuchin also said the Trump Administration will unveil a plan “very soon.”

 

Forecast

While increased demand for higher risk assets and rising Treasury yields are providing support for the USD/JPY, things could turn in a hurry due to geopolitical concerns especially in France and North Korea.

In France, for example, an attack in central Paris, claimed by militant group Islamic State, could bolster Marine Le Pen’s odds in the first round of France’s presidential election. Thursday’s assault on French police officers could reinforce security as the dominant theme on voters’ minds before the polls open on Sunday.

Le Pen has campaigned strongly on security and called for an outright halt on immigration as a means to prevent radicalized individuals from entering Europe. Although a recent poll showed centrist candidate Emmanuel Macron was set to win the election, Thursday’s shooting could push Le Pen into the lead.

Over in Asia, Senior U.S. defense officials say they have seen a greater amount of bomber activity in China hours after North Korea warned Beijing that a nuclear test would be conducted on April 20^th. If the situation over North Korea escalates then look for stocks to plunge as investors move money into the safety of gold and the Japanese Yen.

So while we expect to see a relatively calm trade on Friday with a slight upside bias by the USD/JPY, as long as stocks continue to rally, we’re going to be watching the external events to see if the Dollar/Yen bulls will be forced to take cover at some time during the day.