FX Daily: Trive Bullish on USD/JPY
A second Trump term may strengthen the USD and weaken the JPY especially with a Republican Congress. Proposed tariffs, supply chain restrictions, and potential tax cuts would drive dollar gains and boost U.S. inflation, while pressuring JPY. This scenario could force the BoJ to delay the rate hike by end of the year.
JPY: Under pressures but careful with potential verbal intervention
The JPY faces bearish pressures due to ongoing domestic political uncertainty and a cautious approach from the BoJ. Following the recent indecisive Lower House elections, the Liberal Democratic Party (LDP) is working to form a coalition, with talks ongoing with the Democratic Party for the People (DPP). DPP leader Yuichiro Tamaki has voiced that the BoJ should hold off on any policy adjustments until at least the spring wage negotiations, reinforcing a dovish outlook. While Tamaki’s stance is well-known and doesn’t notably shift market sentiment, his influence highlights the BoJ’s restrained position. Japan’s rates market already factors in a delay in rate hikes, with no significant policy adjustments expected until after wage discussions.
The recent victory of President Trump has added downward pressure on the JPY, which has already weakened in response. Japanese policymakers have voiced concern over excessive FX movements, especially as USD/JPY edges toward critical technical levels near 155. While intervention remains unlikely for now, any rapid move above 158 could trigger more urgent verbal interventions or even potential action from the BoJ. Governor Ueda has cautioned that further yen weakness could reintroduce inflationary pressures, aligning with the BoJ’s goal of inflation control. Meanwhile, Japan’s latest wage data, though slightly below expectations, points to a steady upward trend, further complicating the BoJ’s decisions. Current market consensus indicates that the next rate hike, if any, is likely in early 2024.
In the near term, upcoming Japanese GDP data will play a critical role in the BoJ’s outlook, especially as the yen’s depreciation intensifies. With the BoJ’s GDP growth forecast for FY24 at 0.6%, numbers exceeding this target could bolster the case for rate hikes. Yet, the broader political landscape adds uncertainty, as the LDP and Komeito coalition, potentially relying on DPP support, may struggle to implement decisive policies. This domestic ambiguity, paired with rising U.S. Treasury yields and expectations for higher U.S. fiscal spending under Trump, increases downside risks for the yen. Thus, barring any significant improvement in Japan’s growth outlook, the JPY appears vulnerable, particularly with limited room for BoJ tightening in the near term.
USD: ‘Trump Trades’ continuing
The USD outlook remains strong, supported largely by the “Trump trade” following Donald Trump’s election as U.S. President, with his fiscal stimulus and protectionist policies bolstering the currency.
Trump’s plans for increased government spending and tariffs are expected to drive inflationary pressures, potentially slowing the Fed’s rate-cutting pace and supporting the USD. The Fed has adopted a cautious, data-dependent approach, acknowledging elevated inflation and a steady, albeit slightly moderating, labor market. This economic resilience aligns with a "soft landing" scenario, where the U.S. economy can sustain growth without falling into recession, reinforcing USD strength.
As markets focus on upcoming U.S. CPI and retail sales data, along with commentary from Fed officials, investors are looking for confirmation of the “Trump trade” thesis. Barring any major shocks, Trump’s economic policies are likely to remain the USD’s primary driver in the near term.
USD/JPY 4H Chart
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