USD/JPY is unchanged in the Monday session. Currently, the pair is trading at 114.60. On the release front, Japanese retail sales posted a gain of 0.6%, well short of the estimate of 1.6%. On Monday, Japan releases Household Spending, with the markets bracing for a decline of 0.8%. The US will publish Pending Homes Sales, with the estimate standing at 1.6%. Later in the day, the Bank of Japan will set interest rates for January. No change is expected from the current rate of -0.10%.
The markets had predicted that US economic growth would soften in the fourth quarter, and Advance GDP fell short of the estimate. The economy expanded 1.9%, shy of the estimate of 2.1%. Business investment and consumer spending remains solid and should continue into 2017. However, Trump’s protectionist rhetoric and action, which saw tensions escalate with Mexico last week, could cloud the bright picture for the US economy.
Donald Trump has just started his new position, but he has already signed a host of controversial executive orders which have been condemned both domestically and abroad. Trump has withdrawn from the Trans-Pacific Partnership and declared he will reopen the NAFTA trade agreement with Canada and Mexico. He has also ordered work to begin on a wall with Mexico and banned immigrants from seven Moslem countries. Trump’s unconventional and disjointed approach to international politics and trade could have major ramifications on global trade and could lead to financial instability in global markets, triggering volatility in the currency markets. Just a few days before being sworn in as president, Trump stated that the US dollar was "too strong", blaming a weak Chinese currency. Predictably, the greenback lost ground after Trump’s remarks. Still, Trump’s shock election win in November has boosted the US dollar, with USD/JPY soaring 8.3% during that time.
The BoJ has shied away from tinkering with interest rates, as the current level of 0.10% has been in place since January 2016. No change is expected on Monday, but the bank could change its tune if the dollar breaks above the 120 line. In early 2016, when the yen was trading above 120, Japanese officials warned against what they termed "currency manipulations" and threatened to intervene in order to boost the yen’s value. This led to a public backlash from US officials as fears of a currency war escalated. If the yen continues to weaken and Japan again warns about intervention, we could see some friction between the two countries, especially under a Trump administration that doesn’t appear hesitant to butt heads with its trading partners.