USD/JPY Headed to 114

Given the rise in stocks and the jump in Treasury yields, USD/JPY should be trading higher. Fundamentally, President Trump’s policies from inflation to corporate tax reform, spending, protectionism and future Fed hikes are positive and not negative for the greenback. His latest executive order to build a Mexican wall is an infrastructure spending project that should create jobs and demand for building material. So why the dollar is not strengthening? The problem that the greenback is having right now is two fold – first Trump has been talking down the currency and second, his policies make foreign investors nervous. But the President’s comments on the dollar tend to only have a short-lived impact on the market and foreign investors should be drawn in by the gains in stocks.

Technically, we view any drop towards the double bottom at 112.50 as a buying opportunity. While 114 is an important resistance level, we expect the currency pair to rebound and retest that level in the coming days. Of course a meaningful break below 112.50 would pave the way for a stronger sell-off that could see the currency pair fall to the 111 handle.

Is USD/JPY Headed for 114? Maybe, Maybe Not.

By providing very little details on the specifics of his policy plans and making grand promises (like being the greatest job producer god has ever created), Trump killed USD/JPY’s rally. The currency pair dropped from a high of 116.87 to a low of 114.21 after he began to speak in a sign of disappointment. Technically USD/JPY looks poised for a move back down to 114, but what’s interesting about today’s price action is that stocks cheered his speech and ten year yields which had fallen over 5bp intraday recovered the majority of its losses to end down marginally. This makes us skeptical of a further slide in USD/JPY but unless the currency pair recaptures 116, a return to today’s low near 114.24 becomes likely. In the short term, there’s resistance at 115.50. If USD/JPY clears that level, then the next stop should be 116 – the area where the real battle will take place. If USD/JPY manages to erase all of its post Trump speech losses, then its clear that investors still believe that the new President will deliver on his campaign promises. A drop back below 115 reflects clear skepticism.