USD/JPY is trading sideways in the Tuesday session. In North American trade, USD/JPY is trading at 107.16, up 0.04% on the day. On the release front, Japanese Revised Industrial Production improved to 0.0%, but fell short of the estimate of 4.0%. Later in the day, Japan releases trade balance, with is expected to improve to 0.10 JPY trillion. In the US, the focus was on construction data. Building Permits improved to 1.35 million, beating the forecast of 1.33 million. Housing Starts climbed to 1.32 million, above the estimate of 1.27 million.

Syria remains a geopolitical hotspot after a US-led missile strike destroyed three chemical weapons sites on the weekend. Predictably, Syria and Russia strongly condemned the attack, with Russian President Putin warning that the attack would lead to global “chaos”. Still, a Russian response is unlikely, despite the strong rhetoric. Investors did not show much reaction to the attack, as the markets had already priced in a strike. After the weekend attack, President Trump declaration of “mission accomplished” means that things will remain relatively quiet in Syria. However, further chemical attacks by the Syrian regime could trigger a response from the US and its allies, which could result in volatility in the markets, similar to what occurred last week. If tensions are reignited, traders can expect the safe-haven yen to record strong gains.

In Japan, a government’s monthly economic report was cautiously optimistic about economic conditions. The report indicated that the economy was “gradually recovering”, identical to the statement a month earlier. The report also noted that consumer spending was “recovering”. The economy continues to expand, but the markets are braced for a slowdown in the first quarter. Annualized growth in the fourth quarter was 1.6%, but that is expected to fall sharply to 0.5% in Q1 of 2018. Inflation has been hovering around 1%, well short of the Bank of Japan target of 2 percent. Until inflation gathers steam, the BoJ is unlikely to tighten its ultra-accommodative monetary policy.

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