Is USDJPY the Victim of War on Trade?

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Market Drivers January 23, 2018
BOJ Sticks to 2% target but USDJPY falls through 110.50
GE ZEW beats
Nikkei 1.29% Dax 0.49%
Oil $63/bbl
Gold $1337/oz.
Bitcoin $10300

Europe and Asia:
EUR GE ZEW 95.2 vs. 89.8
GBP UK Industrail Trends 14 vs. 13

North America:
No Data

Yen strengthened in early European trade despite a relatively dovish message from the BOJ which maintained its 2% inflation target and did not suggest that it would taper its quantitative easing program in any way.

At the monthly presser, BOJ Governor Kuroda stated that the central bank still sees more downside risks to prices and added that even though the economy was growing prices have yet to follow suit.

He noted that the central bank was focused on wages as without wage growth prices cannot increase. He also stated that this was not yet the time for a policy exit stating that ETF purchases will continue. The comment caused the USDJPY to spike above the 111.00 figure as traders were disappointed with BOJ’s dovish stance, but the pair eventually gave up the gains and drifted all the way below the key 110.50 support as US yields drifted lower.

As we have been stating ad nauseam, the dollar simply does not have a bid in the FX market right now. Despite the budget deal yesterday and relatively dovish slant by BOJ today USDJPY has failed to gain any traction and now seems destined to retest the key support at the 110.00 level.

The FX markets remain skeptical about Fed’s gradual tightening program given the persistent state of turmoil in DC and the prospect of further trade tensions between US and the rest of the world. NAFTA talks begin today and they will be seen not only as a barometer of trade relations in North America but as a harbinger of US trade policy going forward. Yesterday’s tariffs against solar panels and washing machines may have been the first salvo in the Trump administration’s war on trade and the FX market appears to be reflecting the general investor angst over this course of action.

There is no data on the docket today, but if risk aversion flows pick up the 110.00 level in USDJPY will come into view as the day progresses.

Boris Schlossberg
Managing Director

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