USD/JPY Fundamental Forecast – January 20, 2017

The Dollar/Yen rose on Thursday as investors reacted early in the session to Wednesday’s hawkish comments from Fed Chair Janet Yellen and solid employment and housing data on Thursday. However, the Forex pair gave back most of those gains into the close on position-squaring and safe-haven buying ahead of Friday’s inauguration of Donald Trump as President of the United States.

The USD/JPY closed at 114.845, up 0.211 or +0.18%.

In U.S. economic news, better-than-expected housing and jobs data reinforced the notion that the U.S. economy is growing sufficiently to warrant an interest rate later this year.

U.S. Building Permits came in at 1.12 million units, in line with expectations. Housing Starts rose 1.23 million units, well-above the 1.19 million unit estimate and the 1.10 million unit rise reported last month.

Weekly Unemployment Claims were much lower than expected at 234K. Traders were looking for 252K. The Philly Fed Manufacturing Index was also a robust 23.6 compared to the 16.3 estimate and the 21.5 previous read.

Forecast

The direction of the USD/JPY will be determined by how adverse to risk investors are today.

Trump is scheduled to give about a 15 minute inauguration speech. Typically, the new President tries to unite the country with a general speech on how great this country can be especially after this election highlighted a divided country. The new President then issues a few executive orders and attends celebrations. Investors then shift their focus on the first 100 days.

However, Trump is unpredictable. If he does say something about his economic plans and the market reads the message as bullish then look for U.S. Treasury rates to rise, the U.S. Dollar to strengthen and the stock market to rally. This will put pressure on the lower-yielding Yen because all of those items promote a risk-on scenario.

If Trump does or says anything negative then investors will shed risk and the Yen will rally.

Traders should expect a rangebound trade, but be prepared for volatility. It’s really up to investors today as to whether risk is on or risk is off. Trump may try to act Presidential, which may mean he’ll follow protocol and if he does, it may be a dull session.

In other news, China’s GDP came in better-than-expected at 6.8% versus 6.7%. This is good news for stock investors because it may be a strong indication that its economy is improving, leading to a more stable global economy. This has the potential to be bullish news for investors seeking risky assets.