USD/JPY Fundamental Forecast – January 16, 2017

Mixed U.S. equity markets and general uncertainty ahead of Trump’s inauguration on January 20 helped weaken the Dollar/Yen on Friday. Weaker stocks tend to activate the carry trade whereby investors sell stocks and use the proceeds to buy Yen to pay back loans borrowed in Yen.

The USD/JPY closed at 114.453, down 0.259 or -0.23%.

Investors ignored the stronger than expected U.S. economic data on Friday and instead decided to focus on risk ahead of the inauguration.

U.S. retail sales came in at 0.6%, beating the 0.5% estimate. The Producer Price Index came in at 0.3%, better than the 0.1% estimate, but slightly lower than the previous 0.4%. The Labor Department said the PPI increased 1.6 percent last year. Finally, December consumer sentiment came in slightly below the estimate and business inventories rose 0.7 percent in November.

Forecast

Today is a U.S. bank holiday so volume is expected to be below average. There are no major U.S. economic reports. The stock market will be open, but trading may be light. This could lead to volatility since earnings season began late last week.

Early reports from Japan include Core Machinery Orders, the Producer Price Index and Tertiary Industry Activity. Preliminary Machine Tool Orders will be released later in the session.

Monthly Core Machinery Orders are expected to drop 1.3% versus a 4.1% gain last month. The PPI is expected to come in at -1.4%, better than the previously reported -2.2%. Tertiary Industry Activity is expected to come in unchanged at 0.2%.

Traders will be watching the Preliminary Machine Tool Orders report since showed a 5.6% decline last month.

I expect a sideways to lower trade as investor continue to reduce long positions ahead of Trump’s inauguration. However, we could see a huge rally early next week if Trump reveals his economic plans on Friday during his inauguration speech.