USD/JPY Fundamental Forecast – April 24, 2017

The USD/JPY is expected to gap higher early Monday as investors react to exit polls from the French elections indicating that centrist Emmanuel Macron and far-right Marine le Pen had received enough votes to make it to the second round of the French presidential election.

Investors had been moving money into safe-haven assets over the past few weeks, worried that the far-left, Eurosceptic Jean-Luc Melenchon, who had surged in the polls in recent weeks, could leap ahead of Macron to make it into the final runoff against Le pen, giving voters a choice between two radical candidates who would threaten the future of the European Union.

Traders are reacting to the news by dumping safe-haven assets like Treasuries, gold and the Japanese Yen. Lower Treasuries push up yields, making the U.S. Dollar more attractive than the lower-yielding Japanese Yen.

Money flowing out of gold is lifting global equity markets. The carry trade is back on so investors are borrowing the lower-yielding Yen, selling it to buy dollars to invest in U.S. equity markets.

U.S. stocks are also expected to gap higher as money that had been on the sidelines moves into the markets. If the gap opening attracts additional buying then the Japanese Yen should be pressured further.

Although the tone is expected to be bullish for higher-yielding assets, we could still see some volatility if the actual results show the margin of victory of Macron over Le Pen, tighter than anticipated. This could make investors nervous because it will indicate that Le Pen is gaining momentum.