Date: 03 Jul 2018

Sources with direct knowledge of current thinking at the Bank of Japan told Reuters today that later this month the Japanese central bank will cut its inflation forecasts for both fiscal year 2018/19 and 2019/20. Markets might legitimately conclude that such a decision merely reinforces a view that, whatever happens elsewhere, the BOJ will continue to stick to its ultra-accommodative monetary policy settings. In currency terms, given that might be seen as a negative for the yen although, in the very short term, with USDCNH having traded above 6.70 in Asia today, market concerns about China’s economy could encourage a degree of risk aversion that would lend itself to ‘safe haven’ demand for the Japanese currency. Yet in reality the JPY wasn’t overly-purchased in Asia on Tuesday and USDJPY opened in Europe close to 111.00. Perhaps traders are mindful of analysis by IFR that indicates some USD1.5 billion of option expiries (xxx) today at 1500h London time in the 110.50-75 area, some USD600 million of xxx at 110.95-111.00 and the proximity of the 55-day moving average, currently, at 110.75.  But perhaps traders might also wish to reflect on the fact that later in July there will be trade talks between Japan and the United States, between Japan’s Economy Minister Toshimitsu Motegi and US Trade Representative Robert Lighthizer.  Analysis by the US Treasury in April argued that in real effective exchange rate terms the JPY is “25 per cent below its 20-year average.” Japan’s MUFG Bank feels the Japan-US trade talks set for July are a material risk event for the JPY given, as the Japanese bank wrote, “the White House is already on record in stating that a corrective mechanism for “persistent current account imbalances is the adjustment of exchange rates”.”

Written by Neal Kimberley, External Currency Analyst.