JPY: Talking trade - Rabobank

Measured from the start of 2018, the JPY has gained over 6% vs. the USD and although the JPY has been lifted by speculation that the BoJ could be starting to consider its exit from its huge QQE programme, a significant part of the unit’s firmer tone this year is a consequence of its safe haven status, explains Jane Foley, Senior FX Strategist at Rabobank.

Key Quotes

“Unsurprisingly concerns about a trade war between the US and China have dampened investor appetite for risky assets and supported a better tone for the JPY.  Over the past month, however, USD/JPY has been caught in a choppy range as demand for safe haven has been offset by a thawing of tension on the Korean peninsula as well as news that several countries had negotiated exemptions from the US’s tariffs on steel and aluminium.   Although the JPY’s safe haven status means that the currency often takes its cue from global events, in the coming weeks attention is likely to be drawn to Japan’s particular trading arrangements with the US.”

“This morning Reuters has reported that Japanese officials are concerned that the summit between PM Abe and President Trump in Florida later this month could be used by the US administration as an opportunity to push a bilateral trade deal which may not favour Japan.”

“To avoid the sensitive issue of food, Japanese officials have indicated a preference for talks with the US to be focused on issues such as infrastructure investment and energy.  However, there are concerns that the Trump administration could attempt to negotiation a bilateral agreement with Japan broadly along the lines of the deal recently struck with S.Korea.  This could result in Japan being pressured to open up its market for food in return for exemptions on US tariff on other goods.”

“Although the mood of Japanese officials in Florida this month is likely to be sombre, at least they can boost transparency with respect to their exchange rate.”

“Despite the strengthening in the currency this year, the value of Japan’s effective exchange rate is holding a relatively soft level. Generally speaking, this suggests that Japanese exports should perform well as long as global demand holds up.”

“Although April could be a tense time for Japanese government officials, it is unlikely that bilateral trade discussion between the US and Japan will offer strong direction for USD/JPY. More likely the JPY will continue to respond better to the news flow between China and the US, with concerns of a worsening of trade tension likely lending support to the safe haven JPY and vice-versa.  Given the current uncertainties on trade we see little room for USD/JPY to rise noticeably in the coming weeks.  We are forecasting USD/JPY107.00 on a 3 mth view.”