Forming positions in the USD/JPY based on the release of data on US inflation

The United States is by no means the only country that, faced with impressive economic growth and a strong labor market, is confronted with the riddle of the inflation that just will not accelerate. In Japan, the problem is much more acute. Despite the lowest unemployment rate since the 1990s and the expansion of GDP by 3% y / y in the second quarter, which is the best dynamic since the beginning of 2016, consumer prices froze near 1%. Neither five years of cheap money policy, nor more than two years of targeting the yield curve have brought results. Moreover, if they suddenly do, the Bank of Japan will not know what to do with this result.

Dynamics of Japan's GDP and the BoJ's balance

 

Source: Bloomberg. 

Unlike the US or the eurozone, where as strong evidence appeared that inflation is moving in the direction of the targets, central banks talked about the normalization of monetary policy, the BoJ runs the risk of being trapped in the revaluation of the yen. At the same time, the strong dependence of the economy of the Land of the Rising Sun on external demand makes it vulnerable to a global recession. And in such conditions, investors flee to safe haven assets. A typical example is the reaction of the USD/JPY to rumors that Japan will be the next target of Donald Trump, after the White House leader has finished with China. The yen has strengthened because, first, the markets remember the past when the conflict between Tokyo and Washington led to a fall in the USD index; second, the trade war is fraught with a slowdown in the GDP of the Land of the Rising Sun and the fall of its stock indices.

Friendship is friendship when it doesn't get in the way. Donald Trump often plays golf with Shinzo Abe, but as soon as it's time to pay, golf buddies often become enemies. Although, in my opinion, the press is trying to blow the issue out of proportion. Following the results of 2017, Japan's foreign trade surplus with the United States amounted to $ 68.9 billion, which is less than $ 73.3 billion five years ago.

Thus, in conditions when the BoJ monetary policy is more or less clear (it is highly doubtful that the central bank would make changes in the medium term), and the reaction of the yen and the US dollar to trade wars does not allow one of these currencies to gain an advantage over the other, further dynamics of the USD/JPY will be determined in Washington. As soon as the Fed takes a step toward aggressive monetary restriction, the yield of 10-year bonds will immediately go up, pulling up the pair. On the contrary, the response of the Federal Reserve to criticism of Donald Trump in the form of slowing the normalization of monetary policy will weaken the greenback against the currency of the Land of the Rising Sun.

Dynamics of the USD/JPY and yield of US bonds

Source: Trading Economics.

The key to understanding what exactly will happen is the release of data on US inflation scheduled for September 13. Bloomberg experts expect consumer price growth of 2.8%, core inflation - 2.4% y / y. If the data is better, then the futures market will finally believe in 4 acts of the Fed's monetary restriction in 2018, which will allow the USD/JPY bulls to move quotes in the direction of the upper limit of the previously designated trading range 109-113.5.

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Price chart of USDJPY in real time mode

Will the yen get in the revaluation trap?

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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