Flight-to-safety buying helped drive the Dollar/Yen sharply lower last week as investors responded to geopolitical risks, falling U.S. Treasury yields and negative talk about the value of the U.S. Dollar by President Trump.
The USD/JPY closed the week at 108.606, down 2.434 or -2.19%.
Throughout the week, the driving force behind the weaker USD/JPY was possible U.S. military action in Syria and North Korea, and a resurgence of a previously written-off leftist contender in France’s presidential race.
The possibility of a show of force against North Korea in response to its weapons tests grew after U.S. missile strikes against Syria the week before in retaliation for a chemical weapons attack on civilians.
The Japanese Yen also strengthened as investors weighed the possibility of a face-off between far-right candidate Marine Le Pen and left-wing candidate Jean-Luc Melenchon, who has surged in the polls recently. The price action suggests investors are preparing for a Brexit-like outcome in the election.
The USD/JPY also broke sharply after a key technical level on the longer-term chart was taken out convincingly. This move corresponded with broad declines in the dollar, following President Trump’s remarks to the Wall Street Journal that the greenback was getting “too strong.”
Also in the interview with the Journal, Trump also reversed a crucial campaign promise and said his administration will not label China a currency manipulator.
In economic news last week, U.S. producer inflation fell 0.1%, coming in below expectations and consumer confidence came in better-than-expected. U.S. retail sales also fell for a second straight month in March.
The major news was an unexpected plunge in consumer inflation and retail sales. Disappointments on both inflation and retail sales for March might give the Federal Reserve a reason to pass on a May rate hike.
Investors were also shaken on Thursday by the news that the U.S. military dropped America’s most powerful non-nuclear bomb on ISIS targets in Afghanistan.
Forecast
With geopolitical tensions remaining high and Trump’s call for a lower dollar, traders are more likely to watch the bad news over the good so we expect to continue to see pressure on the U.S. Dollar and support for the Japanese Yen.
In its own show of force, North Korea paraded its intercontinental ballistic missiles on Saturday in a massive military display in central Pyongyang amid rising tensions across the region. This action could spill over into Monday’s trade, putting the USD/JPY on the defensive early in the session.
Furthermore, the international community is bracing for a possible U.S. response to reports that North Korea may be preparing for its sixth nuclear test or a major missile launch, such as its first flight test of an ICBM capable of reaching U.S. shores.
Major economic events this week include a speech by Bank of Japan Governor Kuroda. In the U.S., traders will get a chance to respond to reports on building permits, the Philly Fed Manufacturing Index, Unemployment Claims and a speech by Treasury Secretary Mnuchin.
From the get-go this week, investors will likely be paying close attention to and reacting to the possibility of U.S. and Korean military activity.
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