The monetary policy of the Fed and the Bank of Japan prevents attacks of the USD/JPY bears

The main beneficiary of the escalation of the trade conflict between the States and China was the Japanese yen. Donald Trump raised the stakes with China to exorbitant heights, and Beijing is responding by devaluation of the yuan and the sales of US Treasury bonds, of which it is the largest holder. Financial markets are reacting to the threat of the Chinese economy slowing with a decline of the Shanghai Composite. The situation resembles August 2015 and January 2016, when the collapse of the index of the Celestial Empire has inflated the demand for safe haven assets.

Dynamics of the Shanghai Composite and USD/JPY

Source: Reuters. 

Almost three years ago, Japan was at the initial stage of the QE implementation, so the yen's reaction to the August events was not as turbulent as five months later. In the first half of 2016, the Fed under the influence of the fire on the Chinese stock market shifted the schedule of the monetary policy normalization and instead of three increases in the rate of federal funds, limited itself to one.

Thus, the yen is used to living in conditions of the intersection of the Chinese factor and the divergence factor in the monetary policy. In 2018, the former is expressed through trade wars. And while in this area, the USD/JPY bears have a fairly serious potential for the development of the attack, the various vectors of monetary policy are trump card of the bulls. It is thanks to this driver in the spring that the currency of the Land of the Rising Sun lost almost 7% against the US dollar, allowing the latter to qualify for the title of best performer of the G10. From the point of view of the debt market rates of the two countries, the analyzed pair must be quoted above the 125 mark.

Dynamics of the USD/JPY and yield differential of the US and Japanese bonds

Source: Reuters. 

Despite the fact that, according to the research of the Peterson Institute for World Economy, a global trade war with tariffs of 10% for all product groups will subtract only 2% of the world GDP, fear has many eyes. Investors sell shares of companies in the US technology sector because of rumors about Donald Trump planning the ban on investments from China in this sector. As a result, the S&P500 is declining and the demand for safe haven assets is growing.

The increased turbulence of financial markets, the growth of volatility and the return of carry traders to funding currencies against the background of sales of assets of developing countries are serious arguments in favor of buying the yen. At the same time, import duties can accelerate the US Personal Consumption Expenditures index and force the Fed to act aggressively. Bank of Japan, on the contrary, due to its own inability to achieve a 2% inflation target, will continue to stick to ultra-soft monetary policy for a long time.

Already twice in the last few weeks, selling the USD/JPY played out well, but until the different trajectories of the Fed rate moves and BoJ leave investors alone, it will be impossible to restore the downward long-term trend. I believe that this factor will continue to influence the rate at least within the next 3-4 months, so I forecast a medium-term consolidation of the pair in the range of 107-112.


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Price chart of USDJPY in real time mode

Can central banks persuade the yen?

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