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USD/JPY – Weekly Fundamental Analysis – May 22, 2017

USD/JPY – Weekly Fundamental Analysis – May 22, 2017

There were no major reports from Japan last week, but the currency rose sharply on increased safe-haven buying. Japanese Yen buyers were particularly driven by the drop in U.S. Treasury yields and a steep decline in U.S. equity indexes.

The USD/JPY settled the week at 111.248, down 2.075 or -1.83%.

Political turmoil and reduced expectations for numerous Fed rate hikes in 2017 drove the Dollar/Yen sharply lower last week.  The dollar posted sharp losses as investors, feeling increasingly nervous over the future of Donald Trump’s U.S. presidency, sought safe havens for their money.

Investors from Asia to Europe hit the dollar on reports that investigators were looking at records of numerous undisclosed contacts between the Trump campaign and Russian officials.

Shortly after the election, the dollar surged on the assumption that Trump would boost U.S. growth and inflation with a combination of tax cuts and spending while also encouraging repatriation of foreign-held corporate capital to the United States.

However, that faith in Trump’s ability to run the government and fulfill his campaign promises has steadily evaporated so far this year as the President struggles to deliver the goods.

Also helping to drive the U.S. Dollar lower has been a run of downbeat U.S. economic data in the past month. This news has helped drive U.S. Treasury yields lower, making the dollar a less-attractive investment.

The weak data combined with the political turmoil has casts doubts on the Fed’s ability to act aggressively when raising interest rates in 2017. Although the chances of a Fed rate hike in June have dropped from 95% to 74%, it looks like the current economic weakness and the news is not likely to stop the Fed from hiking its benchmark rate 25 basis points.

However, if the trend continues then investors are likely to continue to reduce expectations for further rises in Federal Reserve interest rates this year.

Forecast

The steep plunge at mid-week was triggered by news reports that were detrimental to Trump. The recovery rally late in the week was helped by the appointment of a special prosecutor. I suspect that this week’s price action is going to follow a similar path.

The USD/JPY will move down on negative news affecting the presidency, and up on non-news days, or the rarely stated positive development for Trump. This price action is likely to continue until after Memorial Day when Comey gives his testimony to the Senate Intelligence Committee. This is because no one really knows the truth except James Comey.

In other news, there are no major releases from Japan this week, but investors will get the opportunity to react to the latest FOMC Meeting Minutes, Weekly Unemployment Claims, Core Durable Goods Orders and Preliminary GDP.

We’re going to continue to monitor the price action around 111.236 and 110.495. Trader reaction to this area will tell us if buyers are taking control, or if sellers are regaining control.