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Is USD/JPY poised for a further breakdown?

  • Market jitters since Friday, when the Trump Administration’s failure to repeal/replace Obamacare became apparent, initially jolted equity markets, the US dollar, and gold when the new trading week opened on Monday. Although these market moves were significantly pared throughout the day, the signal was clear that confidence in President Trump’s ability to achieve his broader economic agenda had diminished even further.
  • This waning confidence brought into question the previously high expectations that Trump would bring about accelerated economic growth and corresponding rises in inflation and interest rates.
  • As a result, the dollar and gold were among the most impacted markets early on Monday, as the dollar initially broke down against its major counterparts while gold surged to approach year-to-date highs. At the same time, the Japanese yen received an early boost due to safe-haven demand in the midst of falling equity markets.
  • The continued fall in the dollar and support for the yen early on Monday extended USD/JPY’s sharp breakdown within the past two weeks. Last week, the currency pair made a major breakdown below 111.50-area support, hitting new year-to-date lows in the process.
  • While the dollar’s sharp fall this month may well have been overdone, the sharp downward trajectory for USD/JPY has shown clear bearish momentum that could extend, given the potential market risks on the near horizon.
  • Chief among these risks is how the Trump Administration carries forward after failing to fulfill one of Trump’s key promises in the repeal and replacement of Obamacare. If Trump quickly moves on to begin tackling pro-growth policies like tax reform and infrastructure spending, the dollar could see a near-term rebound. If, however, this is just the beginning of a series of obstacles in enacting promised policies, the dollar could have significantly further to fall.
  • Other market risks of note include this week’s triggering of Article 50 that formally starts the process of UK/EU separation, otherwise known as Brexit. Also, the French elections that begin in April could pose additional risk for global markets. If these or other such risks lead to more market uncertainty, the Japanese yen (along with gold) could be poised to benefit further.
  • As noted, last week’s pivotal support breakdown extended the strong bearish momentum for USD/JPY. With any further extension of this momentum given the current fundamental circumstances, the next major downside target is at the key 108.00 support level.

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