USD/JPY has been uneventful in subdued markets that have already priced in the ‘phase-one’ deal between the US and China. USD/JPY sits below the 110 handle around 109.91 and between 109.78/01.
There is little left for markets to lean against in this event considering the clear shortfalls of the agreement. “The current trade deal has no provision to limit Chinese subsidies for state owned industries. From a US perspective, this is seen as being largely responsible for ‘excess’ steel and aluminium production which impacts a broad range of sectors in the US including aircraft and semi-conductors,” analysts at Rabobank noted, warning that the heightened concerns remain about cybersecurity and digital trade in addition to the enforcement of China’s Phase 1 commitments regarding intellectual property rights.
“We see it as enviable that tensions between the two nations are set to rise again. This has the potential to impact market expectations about world growth, reduce risk appetite and increase demand for the safe haven JPY.”
Focus is now on the phase-two deal, but speculation in the noise will likely take a back seat to a focus on central banks again at this juncture. There is beliefe that the US could be heading for a recession which should see the Fed cut interest rates sharply. As its stands, there are no calls for a move from the central bank this year, not as far as the dot ply suggests, but calls for fiscal stimulus should rise eventually which would be a weight in the US dollar going forward. As far as the Bank of Japan is concerned, JPY’s function as a safe haven can limit the day to day influence of Japanese policymakers on the exchange rate. Should the markets get a hint of stumbling blocks on the trade front, be it between the US and EU or China and the US, domestic issues could once again take a back seat to geopolitics, benefitting the yen.
For now we expect the JPY to be buffeted mostly by changing levels of risk appetite rather than domestic news. Consequently we are looking for a moderately stronger JPY to emerge during the course of the year,
– analysts at Rabobank explained.
More to come…