USD/JPY Forecast: Is it the time to sell the fact - ‘Trump inauguration’?
|The Dollar-Yen pair rose to a high of 115.62 on Thursday before ending the day around 114.85 levels. The weak follow through to Wednesday’s bullish engulfing candle is a reason to be cautious.
The American dollar failed to hold at the daily high of 115.62 even though the Unemployment Claims dropped to 234K, well below the forecast of 252K.
Buy the rumor, sell the fact
Trump’s surprise election victory on November 9 was followed by a classic ‘buy the rumor’ price action in the USD/JPY pair. Risk assets and the US dollar rose on expectations that Trump would pursue expansionary fiscal policy. This not only means a higher growth rate/inflation rate, but also faster Fed rate hikes. No wonder, everyone called for a strong US dollar and got one.
The markets ran ahead of themselves
Now there is growing realization that markets may have run ahead of themselves. Moreover, there was always a possibility (still is) that Trump could under deliver. However, the markets never took this into account. Now the doors are open for markets to ‘Sell the fact’.
Time to price-in risks associated with ‘Trump Presidency’
Trump’s inauguration as 45th President of the United States brings with it a serious risk of trade wars (with China), the rise of protectionism. Over the last few days, Trump has talked down the US dollar, criticized ‘NATO’, and has cheered Brexit. There is also a risk of Trump administration labeling China as a currency manipulator. So far markets have conveniently ignored all those risks.
However, the ‘honeymoon period’ could end with Trump inauguration. Markets may begin pricing-in the risks associated with Trump Presidency, especially if Trump ups the ante in the first 100 hours of his Presidency.
Technicals - Bullish above 115.62
4-hour chart
- A repeated failure to take out the falling channel resistance in the wake of a bearish 100-MA and 200-MA crossover could yield a sell-off to 114.00-113.75 levels.
- A daily close below 113.75 would open the doors for a re-test of 112.57 levels.
- On the higher side, a convincing break above the previous day’s high of 116.04 would add credence to Wednesday’s bullish engulfing candle and thus open up upside towards 117.50 levels.
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