USD/JPY – Yen Above 118 as Fed Hike Energizes Greenback

USD/JPY has taken a breather on Friday, following strong gains in the past two sessions. Currently, the pair is trading slightly above at the 118 line. On the release front, it’s a quiet end to the trading week. In the US, today’s highlight is Building Permits. The indicator is expected to remain steady at 1.24 million. There are no Japanese events on the schedule. It was a busy day for US indicators on Thursday. CPI and Core CPI both came in at 0.2%, also matching the estimates. Other key events looked sharp, as unemployment claims dipped to 254 thousand, while the Philly Fed Manufacturing Index surged to 21.5 points, well above expectations.

The Federal Reserve rate hike of a quarter percent to 0.50% was widely expected and priced in by the markets at close to 100%. Still, the sheer magnitude of the move triggered a sharp rise by the dollar against most major currencies. The Japanese yen slipped as much as 2.8% in the aftermath of the rate hike, as USD/JPY climbed close to the 119 line in the Thursday session. The pair is trading at its highest levels since February, and the symbolic level of 120 could be tested as early as next week.

Federal Reserve Chair Janet Yellen has worked hard at improving transparency with the markets, and the Fed should get full marks for getting out the message of a December rate hike. This marked the first rise since December 2015 and only the second rate hike since 2008. In its rate statement, the Fed sounded positive about the economy, noting that the “labor market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year“. As well, the Fed revised upwards its forecast of US economic growth to 1.9% in 2016 and 2.1% in 2017, slightly higher than the Fed’s September estimates. What’s next for the Fed? In September, Fed officials said they expected two rate hikes in 2017, but the Fed is now projecting three or even four hikes next year. However, projections can change based on economic conditions, and the markets haven’t forgotten that after the hike in December 2015, the Fed said it expected to raise rates four times in 2015, but ended up raising rates only once. As well, the wild card of Donald Trump could also play a critical role in monetary policy. Trump’s economic platform remains sketchy, apart from declarations that he will increase government spending and cut taxes. If Trump’s economic policies heat up the economy and boost inflation, we could see a number of rate hikes in 2017.

On Wednesday, Japan released the Tankan indices, key indicators which gauge activity in the manufacturing and non-manufacturing sectors. The Tankan Manufacturing Index improved from 6 to 10 points, matching the forecast. The Non-Manufacturing Index remained unchanged at 18 points, just below the forecast of 19 points. These figures point to optimism among large manufacturing and non-manufacturing sectors. The Bank of Japan meets on December 18, and is expected to leave interest rates unchanged at -0.10%. The bank has lowered negative rates into negative territory, but the radical easing has done little to kick-start economic growth or raise anemic inflation levels.

Dot-Plot Blindness has Dollar Bears Bailings

USD/JPY Fundamentals

Friday (December 16)

• 8:30 US Building Permits. Estimate 1.24M
• 8:30 US Housing Starts. Estimate 1.23M

*All release times are EST

*Key events are in bold

USD/JPY for Friday, December 16, 2016

USD/JPY December 15 at 5:20 EST

Open: 118.25 High: 118.43 Low: 117.89 Close: 117.97

USD/JPY Technical

• USD/JPY has been flat in the Asian and European sessions
• 116.88 is providing support
• 118.05 has switched to a resistance line but remains fluid
• Current range: 116.88 to 118.05

Further levels in both directions:

• Below: 116.88, 115.88 and 114.83
•  Above: 118.05, 118.85 and 119.83

OANDA’s Open Positions Ratio

USD/JPY ratio is unchanged in the Friday session. Currently, long positions have a majority (54%). This is indicative of trader bias towards USD/JPY continuing to head to lower ground.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.