The reflation trade has pushed all three major US indices - Dow, Nasdaq, and S&P 500 to record highs, pushed the US dollar index to the highest since April 2003 and led to a sell-off in the bonds and safe haven assets like gold.
The Reflation trade is on ever since Donald Trump won the US Presidential Elections. Investors expect Trump to deliver on his pre election promises - cut corporation tax, ‘spend till end’, boost infrastructure spending, bring jobs back to America…
The base metals rallied as well on hopes the increased infrastructure spending in the US would boost demand.
‘Hope Trade’
- The USD/JPY pair has rallied from 101.16 (Election Day low) to 111.36 (Nov 21 high).
- Dow 30 index has rallied from 18,250 (Election Day low) to 19,043 (Nov 22 high).
In past, the reflation trade i.e. the drop in the Japanese Yen and the rise in the US stocks was the result of Bank of Japan’s aggressive monetary easing.
This time it is the ‘Trump Trade’ that is driving the Yen lower and the US stocks higher. Prospect of a cut in the corporation tax from 30% to 15% coupled with an increase in the infrastructure spending is too exciting for the stock market bulls.
However, the entire rally from the Election Day low is a ‘hope trade’. Donald Trump is yet to take office and there is every possibility that he may fall short of the market expectations. Furthermore, Trump has announced that he plans to scrap the TPP agreement on the first day in office. This is likely to heighten the fears of trade wars/protectionism.
USD/JPY is overbought
Daily chart - USD/JPY (Candles) & Dow (blue line)
- The Dollar-Yen pair and the Dow index have moved hand in hand since the Election Day.
- The daily MACD clearly shows the loss of the bullish momentum in the USD/JPY pair.
- The daily RSI too is overbought and is on the verge of forming a bearish divergence with the price chart.
Dow Daily chart
The daily RSI is overbought and the MACD is showing the loss of bullish momentum.
To conclude - The overbought status of the Dow 30 index adds credence to the overbought conditions in the USD/JPY pair and suggests potential for a correction in the reflation trade. Consequently, it is safer to assume the Dollar-Yen pair is likely to witness a pull back to 1110.-109.00 levels in the short-term.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended Content
Editors’ Picks

AUD/USD: Warming up or the RBA
AUD/USD added to the move higher and rose to new two-month peaks near 0.6370 on the back of the soft tone in the US Dollar and rising expectation ahead of the RBA’s interest rate decision.

EUR/USD: Next target comes at 1.0530
EUR/USD traded in an inconclusive fashion amid the equally vacillating development in the Greenback, returning to the sub-1.0500 region following reduced trading conditions in response to the US Presidents’ Day holiday.

Gold resumes the upside around $2,900
Gold prices leave behind Friday's marked pullback and regain some composure, managing to retest the $2,900 region per ounce troy amid the generalised absence of volatility on US Presidents' Day holiday.

Ethereum Price Forecast: ETH outperforms top cryptocurrencies, sees $1.1 billion in stablecoin inflows
Ethereum (ETH) is up 1% on Monday, stretching its weekly gains to nearly 3%, while other top blockchains experience losses. The top altcoin's recent outperformance can be attributed to rising stablecoin inflows and investment from institutional investors through ETH exchange-traded funds (ETFs).

Bitcoin Price Forecast: BTC stalemate soon coming to an end
Bitcoin price has been consolidating between $94,000 and $100,000 for almost two weeks. Amid this consolidation, investor sentiment remains indecisive, with US spot ETFs recording a $580.2 million net outflow last week, signaling institutional demand weakness.

The Best Brokers of the Year
SPONSORED Explore top-quality choices worldwide and locally. Compare key features like spreads, leverage, and platforms. Find the right broker for your needs, whether trading CFDs, Forex pairs like EUR/USD, or commodities like Gold.