Fundamental Forecast for the Japanese Yen: Neutral
After a month of steady gains, the Yen began last week perched at the highest level since mid-2017. Investors were still digesting the confidently hawkish posture of new Fed Chair Jerome Powell when President Donald Trump suddenly announced an imminent hike steel and aluminum tariffs. Needless to say, it looked very much like the anti-risk Japanese unit might well continue marching upward.
In fact, prices reversed course sharply. The macro backdrop proved to be more inviting. The new US tariff regime seemed more benign than feared. It may still may still lead to retaliation and contagion, but on balance, it appears better than it might have. A mixed-bag offering in February’s US jobs data also helped, calming concerns about an imminent inflationary spike.
A glimmer of hope in the world’s relationship with North Korea was an unexpected bonus. Kim Jong Un is now apparently ready to denuclearize and will refrain from aggressive gestures like bomb and missile tests as dialogue begins. A meeting with Trump is even in the works. The domestic side helped too, with BOJ Governor Kuroda bludgeoning talk about any near-term unwinding of stimulus.
Big-picture developments will probably remain in focus in the week ahead, and once again, the spotlight is on the US. With the most immediate of the glaring political pitfalls seemingly behind them, the markets are likely to turn back to speculation about Fed policy. February’s CPI and retail sales figures are due. Improvements are expected on both counts.
Recent US news-flow suggests analysts’ models are reasonably well-calibrated for economic reality. That lowers the probability of a sharp, volatility-boosting deviation (though certainly doesn’t dispense with it altogether). On balance, that suggests the path of least resistance probably leads lower for the Yen. Absent retaliation to the US tariff hike or some new all-consuming angst, calmer waters look to be ahead.
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