USD/JPY Fundamental Forecast – December 6, 2016

The U.S. Dollar had a volatile session against the Japanese Yen on Monday as confused investors reacted to the results of the Italian Referendum. The vote to change the constitution in Italy and the subsequent resignation of its prime minister was supposed to trigger a response that some were predicting would be similar to the market’s reaction to the Brexit vote or Donald’s Trump’s surprise election.

At first the dollar weakened against the yen, but the market turned around after the Euro posted a strong recovery and U.S. stock indexes rebounded with the Dow reaching a new all-time high.

The USD/JPY closed at 113.842, up 0.375 or +0.33%.

Monday’s economic reports had very little impact on the price action.

In Japan, Consumer Confidence came in at 40.9, below expectations.

In the U.S., Federal Open Market Committee Member William Dudley said he supports gradual interest hikes. He also added that more stimulus could mean the Fed would raise interest rates faster.

St. Louis Fed President James Bullard said properly designed and executed policies to boost infrastructure, modify regulations for some industries and overhaul the tax code “may have some impact…if they are directed towards improving medium-term U.S. productivity growth.”

In other news, U.S. Final Services PMI came in slightly lower than expected at 54.6. ISM Non-Manufacturing PMI beat the 55.3 estimate with a reading of 57.2.

Forecast

Major economic reports will be scarce again on Tuesday. In Japan, investors will get the chance to react to the latest Average Cash Earnings report. It is expected to come in at 0.2%.

In the U.S. investors will be watching the Revised Non-Farm Productivity report. It is expected to come in at +3.2%. The Trade Balance is expected to increase to -41.5 billion from -36.4 billion.

Factory Orders should come in at +2.5%, well-above the previous 0.3%. The IBD/TIPP Economic Optimism report is forecast at 52.3, up from 51.4.

The real driver of the price action on Tuesday should be the U.S. equity markets. On Monday, the USD/JPY followed the major indexes almost lock-step. This is because of the carry trade.

U.S. Treasury yields are not expected to influence the Dollar/Yen too much. However, traders should keep an eye on the U.S. Dollar and the stock indexes for direction.

The USD/JPY could break sharply if the dollar continues to rollover to the downside and the major stock indices pick up where they left off last week with sellers weighing on prices.