The Future Course of the Foreign Exchange Market #102 [Tomotaro Tadashima]
Tomotaro Tajima Profile
Economic analyst. CEO of Alfinaunts. Born in Tokyo in 1964. After graduating from Keio University, he switched careers following his stint at Mitsubishi UFJ Securities Co., Ltd. He analyzes and researches a wide range from finance and the economy in general to strategic corporate management, and even individual asset formation and fund management. He serves as a lecturer for lectures, seminars, and trainings hosted by private companies, financial institutions, newspapers, local governments, and various business associations, with about 150 lectures per year. He has written numerous column pieces and comments in print media, including Weekly Gendai “Rules of Net Trading,” Examina “Money Maestro Training Course,” and more. He has also written columns on stock, foreign exchange, and other topics on many websites, earning high regard as a stock and forex strategist. He has also written the Home Economics section for the Jiyu Kokuminsha “Gendai Yogo no Kiso Chishiki.” After regular appearances on TV (TV Asahi “Yaji-uma Plus,” BS Asahi “Sunday Online”) and radio (MBS “Kaji-chan’s Asa-ichi Radio”), he currently serves as a regular commentator on Nikkei CNBC “Market Wrap” and Daiwa Securities Information TV “Economy Marche.” Notable DVDs include “Very Easy to Understand: Tomotaro Tajima’s FX Introduction” and “Very Easy to Understand: Tomotaro Tajima’s FX Practical Technical Analysis.” Notable books include “Wealth Reassessment Manual” (Paru Shuppan), “FX Chart ‘Formula for Profit’” (Alchemix), “Why Can FX Make You Wealthy?” (Text) and many more. The latest publication is “How to Profit by Riding the Rising U.S. Economy” (Jiyu Kokuminsha).
※This article is a republication and editing of an article from FX攻略.com, October 2018 issue. Please note that the market information described in the main text may differ from the current market.
Rethinking Trump’s Pledge: The Trilemma
In the previous update, the author stated that July 6, when the U.S. administration planned to impose sanctions on China, would be “a kind of deadline.” At the same time, he noted that “from the standpoint of facing the market, one should understand that there is a possibility of accidental developments, but, essentially, there would be a time when market caution would ease for some reason,” and predicted that around July 6, the USD/JPY and cross yen pairs would test higher. As expected, USD/JPY began to test higher around July 9, rising from the 110-and-some range to the 113-range in a rapid move.
Honestly, as noted earlier, while acknowledging the possibility of an accidental development, the author believed that the U.S.-China talks would come to some accommodation before July 6. However, that reading proved incorrect, and the U.S.-China trade situation entered a state of “war.”
Nevertheless, after sanctions were imposed, the market surprisingly priced in some relief, with a momentary appearance of yen weakness, dollar strength, and rising U.S. and Japanese stock prices. Subsequently, on July 10, the Trump administration announced a plan to apply additional tariffs on China worth $200 billion, but even if enacted, it would take effect in September, so as a near-term factor for the market, it seems to have been put on hold for the moment.
Moreover, in an appearance on CNBC on July 20, President Trump was reported to have suggested possibly expanding the tariff targets against China to $500 billion. At this point, everything feels childish and somewhat ridiculous, making it difficult to respond or react seriously.
Martin Wolf of the Financial Times described the situation as a “dangerously ignorant” act breaking the existing system “like a two-year-old.” Jana Ganesh of the same newspaper said, “It is a mistake to believe the future cannot be changed,” and suggested that his recent European trip indicated the phenomenon might be temporary.
While one cannot be blindly optimistic, one does not need to be overly pessimistic either. Looking back, many readers may recall the word “trilemma” appearing in their minds when considering Trump’s numerous campaign promises upon his inauguration. Needless to say, it is impossible for “3.5%–4% economic growth,” “low interest rates,” and “a weaker dollar” to be satisfied simultaneously. That seems to be the crucial point.
Martin Wolf also stated that “in a near-full-employment country, reducing the trade deficit through a recession is something economists know well.” Indeed, if the U.S. economy slides into a downturn, at least one of the ignorant two-year-old’s grievances would be resolved. However, if that happens, the economic damage to Japan, China, and others would be far greater than that to the United States, and the dollar would likely maintain its strength against the yen and the yuan.
Of course, conversely, if the U.S. economy sustained a four percent growth, U.S. interest rates would rise, and the dollar would appreciate. Incidentally, as the dollar weakens, domestic prices in the U.S. tend to rise, which in turn encourages more dollar buying in the market.
