Yen Slips to 10-Week Low as Trade War Rhetoric Softens

Yen Slips to 10-Week Low as Trade War Rhetoric Softens

USD/JPY has posted strong gains in the Monday session. In North American trade, USD/JPY is trading at 108.57, up 0.86% on the day. On the release front, Japanese Flash Manufacturing PMI inched up to 53.3, just shy of the estimate of 53.4 points. Later in the day, Japan releases Services Producer Price Index, which is expected to drop to 0.5%. In the US, Existing Home Sales improved to 5.60 million, beating the estimate of 5.55 million. This marked a 4-month high. On Tuesday, the Bank of Japan releases Core CPI and the US publishes CB Consumer Confidence.

Is the US-China trade war headed to a trade truce? The markets have been marked by volatility in recent weeks, in response to tariffs which the US and China have imposed on the other. US President Trump has threatened to slap tariffs on up to $150 billion on Chinese goods, and China has promised to respond with heavy tariffs on US imports. The escalating crisis has raised fears that a trade war between the two economic giants could slow down Chinese growth and trigger a global recession. However, US Treasury Secretary Steven Mnuchin sought to lower the rhetoric on the weekend, saying that he was considering a trip to China, adding he was “cautiously optimistic” that the two sides could resolve the trade dispute. If the US and China can patch up their differences, the safe-haven Japanese currency could continue to lose ground.

Japan’s economy continues to grow and key indicators are generally performing well. At the same time, inflation has lagged and remains well below the Bank of Japan’s target of around 2 percent. The markets have been speculating that stronger economic conditions might cause the BoJ to re-examine its ultra-accommodative monetary policy. However, on Monday, BoJ Governor Haruhiko Kuroda poured cold water over such sentiment, stating that in order to reach its inflation target, “the Bank of Japan must continue very strong accommodative monetary policy for some time”. The BoJ will issue an inflation forecast on Friday, with the bank expected to reiterate that the inflation target will be met in fiscal year 2019-2020. Kuroda’s dovish statement can be seen as an attempt to curb volatility in the yen after the inflation forecast is released.

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