USD/JPY Fundamental Forecast – February 10, 2017

It looks as if Dollar/Yen investors have gone back to following the traditional fundamentals after several weeks of reacting to the directives of President Donald Trump. Gone seems to be the thought that Trump wants to see a weaker dollar. Additionally, traders now appear to be pricing in potential rate hikes by the Fed.

Some of the shifts in investor sentiment were caused slightly hawkish comments from Fed officials. Some by bullish remarks from Trump on his tax plan. The surge in the stock market also brought back to life the carry trade. Investors also seemed to forget all about the upcoming elections in Europe. It’s remarkable how fast investors change their minds these days, which is why following the news can sometimes be a difficult task.

The USD/JPY closed at 113.226, up 1.291 or +1.15%.

Trump’s remarks set the rally by the Dollar/Yen in motion on Thursday when he promised a “phenomenal” tax plan in a White House meeting with airline executives, although he did not offer specifics other than citing the need to a lower tax burden on businesses.

Forecast

The combination of talk of higher U.S. interest rates, Trump’s tax plan and the return of the carry trade are three bullish factors that could drive the USD/JPY higher over the near-term. Although the main trend is down, it looks as if there is enough upside momentum being generated to drive the market into a key retracement zone at 115.121 to 115.955. Taking out this area will change the trend to up.

If sentiment changes back to bearish, then sellers may go after the recent bottom at 111.583. This could lead to an eventual move into 109.919 to 107.856.

Recently, the USD/JPY price action was dictated by the uncertainty towards Bank of Japan policy and U.S.-Japan currency diplomacy on one-hand, and hopes for U.S. tax reform on the other. Trump may have taken care of concerns over tax reform on Thursday and Friday’s meeting with Japanese Prime Minister Shinzo Abe may take care of the rest of the concerns.

The argument for higher rates may have started earlier in the week with relatively hawkish comments from Philadelphia Fed President Patrick Harker. He said that March “should be considered” for an increase in interest rates, suggesting that the Federal Reserve might not have such a dovish outlook as markets had assumed following its February meeting.

Chicago Federal Reserve President Charles Evans told reporters it is reasonable to expect the Fed to raise rates three times this year. However, St. Louis Fed President James Bullard offered a different opinion. He said interest rates can likely remain low through at least 2017, with no clear sense yet of whether the Trump administration’s policies will spark higher inflation or growth.

Given yesterday’s momentum in the dollar and strong close, it looks as if today is going to be another “risk on” day which should continue to underpin the USD/JPY.