USD/JPY trend will depend on monetary policy and trade wars

The main beneficiary of trade conflicts between the USA and China has become the Japanese yen. The safe heaven status allowed it to strengthen its leadership in the race for the best performance among G10. The greenback, featured a strong rise in April-June, is not far; however, its success surprisingly can support USD/JPY bears in the near future. About 40% of the US companies' incomes come from abroad; and the revaluation will worsen the corporate accounting, resulting in the S&P 500 correction. Lower global risk appetite will increase the demand for risk-free assets.

Yen has lost about 5% against the US dollar since March. I think the main reasons for its weakness to be investors’ return to the topic of divergence in the Fed and Bank of Japan Monetary policies, and the market’s immunity to trade wars. Investors still see them as a kind of Donald Trump’s game. Recently, hardly anybody believed that anyone would oppose the US president. Even his intention to impose 10% tariffs on Chinese imports worth $200 bn is still seen as bluffing. China seems to have nothing to beat this card. In 2017, it bought the US goods worth $130 bn (the USA – for $505 bn). To respond equally, China needs either impose higher tariffs on the same products, or use other tools.

The US trade deficit with different countries

Source: Bloomberg

Investors prefer to wait and exploit the factor of oppositely directed monetary policies. On the short and middle scope, yen looks quite weak. The Fed is willing to hike the federal funds rate above 3% in late 2019; when the Bank of Japan, as the inflation rate isn’t moving towards the target (the core inflation rate was down at 0.7 % in April), will continue the policy of targeting the yield curve. The indicator will stay close to zero, and the wider spread with the US bonds will support the capital flow from Japan to the USA.

Dynamics of Japan’s inflation rate

Source: Bloomberg

In the long run, yen’s prospects are far better. Other central banks, following the Fed, will normalize the monetary policy. It will reduce the excessive liquidity and support the correction of global stock indexes, and so, lure carry traders back to funding currencies. Therefore, both synchronized recovery of global economy and its decline, in fact, can turn out to be good foreign environment for the Japanese yen.

Currently, as the markets are focused on the divergence in monetary policy, retaining the immunity to trade wars (to introduce tariffs worth $200 bn, they will need at least three months), the USD/JPY can well go up to 112.1 and 113.5, where it makes some sense to sell the pair. On the contrary, if investors take the trade conflict seriously and stop being too happy with the four hikes of the Fed’s interest rate, the breakout of the resistance at 109-109,25 will open to bears the way down.


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Price chart of USDJPY in real time mode

Yen Weighs Risks

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