USD/JPY Fundamental Forecast – December 8, 2016

The Dollar/Yen posted an outside move and lower close on Wednesday despite the stronger U.S. equity markets. This suggests the correlation between demand for higher risk assets and lower risk assets may be waning. This may not mean the trend is getting ready to turn down, but it does signal a loss in upside momentum that could lead to the start of a near-term correction.

The recent pause in the Dollar/Yen Forex pair is probably just a consolidation after its recent spectacular run.

The USD/JPY closed at 113.751, down 0.276 or -0.24%.

Forecast

Just to be clear, the USD/JPY may be setting up for a short-term correction because of the divergence between the Forex pair and the stock market. Adding to the possibility of a short-term correction are overbought technical indicators. Furthermore, recent data from the U.S. Commodity Futures Trading Commission shows that speculators are only net short the yen by 3,000 contracts. This could be an indication that the market has run out of buyers.

Longer-term, the bets have been laid for the rally to continue due to expectations of “Trumpflation”, which may lead to a faster pace of Federal Reserve tightening in 2017.

Traders will find out more about the Fed’s plans for future rate hikes next week on December 14 when it makes its interest rate decision and issues its latest monetary policy statement.

The Fed is probably going to say that it prefers to increase rates gradually, but it may mention it will be flexible given Trump’s fiscal policy spending plan.

Additionally, the Bank of Japan is likely to continue with its monetary easing bias. The BoJ’s next policy decision is due on December 20. And the charts indicate there is room for the USD/JPY to rally.

In economic news released earlier on Thursday, the Japanese Current Account came in at 1.93 trillion. This was higher than the 1.57 trillion estimate and the 1.48 trillion previous read. This is actually good news for the currency.

Quarterly Final GDP came in at 0.3%, lower than the 0.6% estimate and the 0.5% previous read.

The calendar is light in the U.S. on Thursday. Weekly Unemployment Claims are expected to drop to 258K from 268K.