Japanese Yen May Gain as Focus Shifts Back to Trade War Fears

2018-06-15 04:45:00

Daniel Dubrovsky, Contributing Senior Strategist

What's on this page

Japanese Yen Fundamental Forecast: Bullish
Japanese Yen Trading Resources:

Japanese Yen Fundamental Forecast: Bullish

Talking Points:

Japanese Yen faced the North Korea Summit, Fed, ECB and BoJ rate decisions
With those key event risks now behind us, focus shifts back to trade war worries
The US is pressing Chinese tariffs, the anti-risk unit stands to gain if stocks fall

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Looking at an average performance of the Japanese Yen against its major peers, the currency experienced a volatile week but was on course to finish it mostly little changed. It first fell as optimism ahead of the Trump/Kim summit lifted sentiment. However, it found itself rising in the aftermath of the Fed and ECB rate decisions later on.

However, its performance towards the end of last week could be a prelude to what is in store next. The Bank of Japan rate decision helped send the Yen cautiously lower, but a deterioration in sentiment on trade war fears beforehand was driving some Asian shares down. During the former, the central bank did not have much to offer as rates were left unchanged and they continued to reiterate the status quo.

Speaking off, the upcoming Japanese inflation report is unlikely to generate much Yen volatility. In general, local economic data tends to have a limited impact on the unit given its relatively minor implications for monetary policy. The one exception is what the BoJ is trying to bolster, CPI data. Even then, Japan’s May inflation data on the 21st is expected to remain mostly in line with April’s measurements and below target.

Thus the focus for the anti-risk Japanese unit ahead will arguably be risk trends as they were towards the end of last week. So what happened there? Reports crossed the wires that US President Donald Trump approved tariffs on $50 billion of Chinese goods. Not surprisingly, China was reported readying up to retaliate. Meanwhile, Mexico was mulling tariffs on US corn and soy. Asian stocks declined as the Yen rose.

With the Fed, ECB and BoJ now behind us, the markets have to keep settling with an uncertain reality around global trade tensions which are still heightened. Last week, we also had the G7 leaders summit where Mr. Trump deepened a rift between the US and its major allies. This opened the door for further retaliation and that is what we saw indeed.

Keep in mind that earlier this month, China threatened to withdraw ‘all’ commitments in talks with the US on trade such as finding ways to reduce its surplus with them. As such, brewing trade tensions between the US, its allies and China paves the way for sentiment to continue deteriorating. With that in mind, the anti-risk Japanese Yen is likely to appreciate ahead and the fundamental forecast will have to be bullish.