USD/JPY Forecast: Feb lows could be revisited ahead of Trump speech

The Dollar-Yen pair fell for the third consecutive on Friday as the 10-year Treasury yield fell to one-month low. The spot fell to a low of 11.93 before ending the last week at 112.145. The bid tone remains weak in the Asian session, with the pair falling from 112.31 to 111.95 levels.

The 10-year Treasury yield dropped to a low of 2.31% on Friday and trades around 2.32% in Asia.

Trump speech preview - High on rhetoric, low on substance

Wires are reporting that Donald Trump’s address to the US Congress on Tuesday could overshadow economic data releases and trigger market action. I expect the speech to be high on rhetoric and low on substance as the official announcement related to budget are unlikely before March 14.

Moreover, Mnuchin informed markets last week that tax plan is unlikely to come through before August. Also the market friendly reforms- tax cuts, infrastructure spending - need to be approved. It is said that infrastructure spending plan and the positive effect of tax cuts would be seen only in 2018.

No wonder, the Treasury yields are losing weight and thus markets are likely to offer US dollar in the run up to Trump speech.

The slump in the treasury yields also represents the falling March Fed rate hike bets. One may argue that bond markets could be wrong, however, the window to change market perception is fast closing. Fed remains market-dependent and would do nothing that would shock/surprise markets.

Durable goods - Durable impact on the USD unlikely

The data due today is likely to show the durable goods orders rose 1.6% in January and core orders rose 0.5% in January. The headline figure is likely to take a back seat as it is often distorted by the volatile aircraft category.

The core orders had increased 0.5% in Dec. Further, unfilled orders for non-defense capital goods, excluding aircraft, had also increased by 0.5%. This indicated that businesses are preparing for a stronger economic growth in the current year.

It will be interesting to see if the Trump optimism remained intact in January. Strong core numbers could help US dollar strengthen, although the boost could be short lived, given the Trump trade has come under pressure. Meanwhile, weaker-than-expected core numbers could see the spot break below February low of 111.61 levels.

Technicals - Trend line support stands exposed

Daily chart

Support

111.99 (38.2% fib retracement of Trump rally)

111.61 (descending trend line support + Feb lows)

111.50 (50-DMA)

110.60 (support offered by the trend line drawn from Jan low and Feb low)

Resistance

112.62 (Feb 17 low)

113.13 (10-DMA)

113.78 (Feb 21 high)

113.95 (Feb 1 high)

• Bears are likely to attack the support at 111.60 given the turnaround from 114.96 despite bullish break from falling wedge and the subsequent falling top formation on the daily chart. The daily RSI is below 50.00 pointing lower as well.
• The offered tone would strengthen further if the spot closes below 111.60 today, in which case the next support at 110.60 could be put to test.
• On the higher side, only a daily close above 113.00 (descending trend line) would signal bearish invalidation.