USD/JPY Fundamental Forecast – January 24, 2017

Greater demand for lower risk assets helped drive the Dollar/Yen lower on Monday. Traders also reacted negatively to Trump’s decision to withdraw from the Trans-Pacific-Partnership as well as negative comments about the U.S. Dollar from Trump’s Treasury Secretary nominee.

The overall weakness in the U.S. Dollar was tied to the thought that Trump is taking a protectionist trade stance that may eventually lead to a trade war.

The USD/JPY finished the session at 112.708, down 1.845 or -1.61%.

In addition to pulling out of the TPP, Trump is also expected to renegotiate the free trade agreement between the United States, Canada and Mexico.

The dollar was primarily driven lower by a steep drop in U.S. Treasury yields. The benchmark 10-year yield posted its biggest decline in more than two weeks as concerns over Trump’s aggressive decisions drove investors into the safety of Treasury bonds and notes.

Trump was a busy man on Monday. In addition to pulling out of the TPP deal, he also threatened to impose a “very major” border tax for companies who shift production out of the U.S.

Last week Trump drove the U.S. Dollar lower against the Japanese Yen when he said the U.S. can’t compete with China because the U.S. Dollar is “too strong”. This week, it was U.S. Treasury Secretary nominee Steven Mnuchin’s turn to drive the Greenback lower.

“The strength of the U.S. Dollar has historically been tied to the strength of the U.S. economy and the faith that investors have in doing business in America,” Mr. Mnuchin said in written response to a senator’s question about the implications of a hypothetical 25 percent rise in its value. “From time to time, an excessively strong dollar may have negative short-term implications on the economy.”

Forecast

Unless technically oversold factors come into play, the USD/JPY should continue to see weakness over the near-term because Trump has set in motion a series of events that should continue to drive the U.S. Dollar lower. This trend could continue until the Fed starts to talk seriously about raising interest rates due to rising inflation.

Earlier today, Japanese Flash Manufacturing PMI came in at 52.8, higher than the 52.3 estimate and the 52.4 previous read.

Later today, investors will get the opportunity to react to the latest Flash Manufacturing PMI data, Existing Home Sales and the Richmond Index.

To recap, in my opinion, the only way to stop the dollar’s slide is for the Fed to raise rates. Early data from the Fed Funds Indicator points towards June as the first date to seriously consider a rate hike. If this is true then the USD/JPY could trend lower for a long time.