【Dollar/Yen Exchange Rate】Last week's market and this week's outlook
【Dollar/Yen Exchange Rate】Last week's market and this week's outlook
Since April 22, the USD/JPY pair has been in a range-bound state. The range is about 111.0 to 112.3 yen. However, the feature is that the upside above 112 yen becomes heavy. At the FOMC meetings held on April 30 and May 1, signals suggested the U.S. economy would continue to improve, the stance remained unchanged, and some expectations for rate cuts were trimmed.
The U.S. 10-year bond market has been trading around the 2.5% level with a stable move, and the 2-year U.S. Treasury yield, which is highly correlated with USD/JPY, has stabilized around 2.3%. This strong correlation is a major reason why USD/JPY has been in a range-bound state.
The dollar was bought up to 112.3 yen on April 25, hitting an intraday high for the year, but like April 12 and 17, there is not enough momentum to push further above the 112 yen level. When it touched 112.1 yen on March 5, the dollar subsequently tested lower levels, falling to 109.7 yen by March 25. Comparing the U.S. and Japanese economies suggests the U.S. is stronger, and with inflation still subdued, which the Fed indicates may rise in the mid term, U.S. bond yields would also rise as inflation starts to pick up, suggesting a higher probability of a medium-to-long-term dollar-buying trend. However, in the near term the dollar appears to have formed a near-term top, so it is entering a phase where it may test lower levels. If U.S. 10-year and 2-year yields do not fall further, the dollar's downside is limited. If the 109.7 yen level seen on March 25 is not breached further and the dollar does not test lower, the range-trading market could persist for a while.
On the trade tariff front, U.S.-China trade talks appear to be approaching a final stage. On April 29, U.S. Treasury Secretary Mnuchin commented that he hopes to be in a situation where, at the next two ministerial-level talks in Washington, he can advise President Trump on whether an agreement should be pursued in terms of trade policy. At the April 30–May 1 ministerial trade talks, if China can secure an arrangement with the U.S. that verifies China’s steps to reduce its trade deficit with the U.S., then the U.S. would first eliminate part of the $200 billion in tariffs immediately and remove the remainder gradually. For the remaining $50 billion, tariffs would be maintained until November 2020 presidential election.
On May 5, President Trump tweeted that if talks collapsed, tariffs on China would be raised to 25% on the 10th, but from May 8 to the weekend of the 10th, Vice Premier Liu He and U.S. negotiators in Washington signaled the possibility of a final agreement in ministerial-level talks. If a deal is reached after this negotiation, a summit between the leaders of the U.S. and China could be scheduled, impacting global trade and economic growth. Conversely, a breakdown would introduce volatility and could trigger temporary dollar selling and yen buying.
Furthermore, if U.S.-China trade talks settle, the next focus would be the U.S.–EU trade talks and Japan–U.S. goods trade negotiations. In USD/JPY, the question is whether exchange-rate provisions will be included in the Japan–U.S. trade talks. As Aso'sFinance Minister has argued, the issue of exchange rates between the U.S. and China could be kept separate from trade talks and handled through ongoing discussions between finance ministers, as has been done historically. If the exchange-rate issue becomes a focus within trade talks, the United States, which has historically run a large trade deficit with Japan, could trend toward more dollar selling and yen buying.
In the FOMC statement released in the early hours of the 2nd, it stated, “The U.S. economy continues to expand at a solid pace, and employment has been firm in recent months. Personal consumption and business fixed investment have slowed somewhat in the first quarter and the overall inflation rate and the core inflation rate, excluding food and energy, remain below the 2% target and are stable. Taking into account global economic trends and low inflation, the FOMC will be patient about the next adjustment.”
In a press conference after the FOMC, Fed Chair Powell referred to calls for rate cuts from President Trump and some Trump administration officials, saying, “The current policy stance is appropriate. The Fed does not engage in nor consider short-term political considerations when making policy decisions.” Following this remark, U.S. Treasury yields rose modestly. Powell highlighted potential risk factors including the economic trends and trade negotiations in China and Europe, and Britain’s Brexit issues.
Regarding long-term and short-term rates, the U.S. 10-year and 2-year yields have shown a tendency to ease as comments from President Trump and Vice President Pence urging rate cuts were echoed. Overall, however, the trend has been to stabilize. With the decision to hold steady and an outlook for U.S. economic expansion, yields have risen somewhat after the FOMC. On the weekend of the 3rd, the 2-year yield was 2.33%, the 5-year yield 2.32%, and the 10-year yield 2.53%. The inversion between the 2-year and 5-year yields is normalizing, and although it persisted at the end of last week, the yield gap has narrowed to a delicate extent. Global and U.S. growth concerns are easing.
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