Yen to rise on better than expected inflation data

In mid-January, the Greenback tumbled against the most traded currencies when Trump expressed his concern about the rising strength of the US dollar. In particular, the USD/JPY pair fell about 300 pips to record a low of 112.51.

However, expectations of a boost in infrastructure spending, deregulation, and tax reforms aided the US dollar to swiftly regain the lost ground. The recovery was not backed by positive economic data. In fact, as detailed below, the recent economic data from the US is not as per analysts’ expectation. Thus, we forecast the USD/JPY pair to trend downwards in the short-term.

The US Department of Labor reported that the unemployment claims for the week ended January 21 st increased to 259,000, from 237,000 reported a week earlier. Investors may not feel comfortable with the report as analysts had expected unemployment claims of 247,000 only.

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According to the Census Bureau, the US trade deficit declined marginally in December. However, the wholesale inventories increased 1% m-o-m in December. The market had expected only a 0.9% increase in the wholesale inventories.

More importantly, the Census Bureau stated that the new-home sales declined to a 10-month low of 536,000 in December. The figure is far less than the upwardly revised 598,000 new homes sold in November and below analysts’ estimates of 585,000.

In Japan, the Statistics Bureau reported that the consumer prices increased 0.3% y-o-y in December 2016, compared with a 0.5% rise in the previous month. The figure was better than analysts’ expectation of a 0.2% increase in the consumer prices. Earlier on last Wednesday, the Ministry of Finance reported a 361% increase in the trade surplus to Yen 641.4 billion in December 2016, from Yen 153 billion reported in the prior month. Analysts had expected a trade surplus of Yen 270 billion. The above discussed economic data suggests that the US dollar would remain weak against the Yen in the week ahead.

The self-illustrating image provided underneath shows the existence of resistance for the USD/JPY pair at 115.80 levels. Technically, the stochastic oscillator reflects an extremely overbought scenario. Thus, we can anticipate the USD/JPY pair to correct itself.

A short position in the USDJPY pair would allow a currency trader to gain from the probable decline. The position can be opened near 115.80, with a stop loss order above $116.80. The short position can be winded near 113.60.

With a put option or its equivalent contract in place, a binary trader can hope to realize gains of up to 72% in a short-term. The contract should be purchased only when the USD/JPY pair trades near 115.80. A time period of one week should be allowed for the contract to expire.

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