USD/JPY Forecast: Doors open for July highs on ‘Trumponomics’

Dollar-Yen pair dropped to an Intraday low of 101.19 after Trump victory caught markets by surprise leading to a broad based risk aversion. The 10-year Treasury yield dropped 20 basis points in initial reaction to Trump victory.

However, the Treasury yield recovered losses and rose above 2%, thus helping the Dollar regain the bid tone. The USD/JPY pair recovered entire losses and eventually ended the day at 105.69; its highest daily close since July 25.

Market readies for fiscal splurge

With Republicans holding power in both houses of congress, markets are preparing for an upcoming fiscal splurge by the Trump government. This is evident from the sharp rise in the treasury yields.

During his post victory speech, Trump refrained from making controversial statements, called for a greater cooperation between the Republicans and the Democrats and said “We are going to fix our inner cities and rebuild our highways, bridges, tunnels, airports, schools, hospitals. We’re going to rebuild our infrastructure, which will become, by the way, second to none. And we will put millions of our people to work as we rebuild it.”

The comments not only calmed market nerves but also cemented expectations of a major fiscal spending effort in the US.

Fiscalism leads to higher inflation & higher rates

Fiscal spending is widely expected to boost inflation expectations and thus opens doors for a Fed rate hike. Moreover, the combination of heightened expectation of fiscal stimulus and financial market stability post Trump victory has kept Dec rate hike probability intact around 80%.

The net effect is the dollar is likely to stay bid heading into the December Fed meeting. Moreover, Dec Fed rate hike bets are resilient to weak data. This is because weak data releases would be blamed on election uncertainty.

Thus, overall the Dollar-Yen pair appears on track to test the key resistance at 107.50 (July 21 high).

Technicals - Dip demand likely, eyes July highs

Daily chart

• Pair’s sharp rebound from 101.19 followed by a daily close above 105.176 (23.6% of 2015 high - 2016 low) in the wake of a rounding bottom formation suggests the doors are open for a test of supply around 107.50 (July 21 high).
• Also note the descending trend line from December highs and February high also slopes down to 107.50 levels currently. The trend line is seen sloping down to 107.00 levels by November end.
• On the lower side, only a daily close below the rising trend line drawn from Sep 27 low and Nov 3 low would signal bullish invalidation.