Underestimating Political Risk in USDJPY?

Market Drivers May 10, 2017
USDJPY wobbles on Trump news
Comm dollars rebound
Nikkei -0.29% Dax 0.03%
Oil $46/bbl
Gold $1224/oz.

Europe and Asia:
No Data

North America:
No Data

There were no major economic news releases today across any of the three main trading sessions and currencies, therefore, remained in narrow trading ranges for most of the Asian and early European dealing. Last night's geo-political shocker out of the US however, did have an impact on USDJPY which was pressured lower for most of the overnight trade.

The sudden firing of FBI chief James Comey by President Trump created a big stir on the political front, but so far has had only a limited impact on the markets. USDJPY dropped from the 114.00 level to hit lows at 113.62 but held support there and rebounded a bit.

The market remains resolutely bullish USDJPY and continues to be in a "buy the dip" mentality, as FX traders continue to believe that US growth will pick up markedly in H2 of 2017 and the Fed will maintain its rate hike path. That scenario however, depends on a relatively calm geopolitical picture that would allow President Trump to focus on domestic issues and craft a tax reform legislation that the market is eagerly awaiting.

However, if yesterday's action is just the start of a massive constitutional confrontation with both Republicans and Democrats demanding an Independent Prosecutor on Russia collusion probe, than much of Mr. Trump political capital will be wasted on defending himself against accusations of malfeasance. It's difficult to see how any meaningful legislation can pass Congress under such conditions. Furthermore, the political rancor caused by these actions could have a negative impact on consumer sentiment and that would destroy any forecasts of 3% or better growth in the second half of this year.

In short, while markets remain placid and calm about the current chain of events, there is considerable risk that the Russia probe could uncover criminal activity in the White House which would trigger risk aversion flows back into yen, despite Governor Kuroda's best efforts to expand QE. For now, the assumption of the FX markets is that the primary driver of trade in USDJPY is economic growth. However, yesterday may be an early signal that the story has changed and that politics may be the dominant theme from this point on.

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