Japanese economy contracted in the first quarter
The Japanese yen took a dive yesterday as USD/JPY climbed to 110.45, the highest level since February 2nd. Most of the move could be explained by a renewed sell-off in US Treasury, which sent the 10-year yield to 3.09% yesterday that fuelled another dollar rally. Indeed, it seems that market participants are completely ignoring local development in Japan and focus exclusively on USD related developments. Indeed, despite a contraction of the Japanese economy in the first quarter (-0.2%q/q versus 0.0% median forecast and +0.1% in Q3), the yen reversed losses partially as USD/JPY eased to 110.08, down 0.15% on the day. Meanwhile, the US 10-year yield slid to 3.06%, down 3.7bps from yesterday’s high.
In addition, the mounting geopolitical tensions stemming from trade war initiated by Donald Trump, the US unilateral withdrawal from the Iran nuclear deal, which create tensions with the European Union and especially France as well as the recent opening of the US embassy in Jerusalem, are not enough to depreciate the risk sentiment and trigger a yen recovery.
The widening monetary policy divergence between the Federal Reserve and the Bank of Japan is all that matter right now. Even though it cannot be ruled out that the Fed could slow down its pace of tightening, the BoJ is miles away from tightening its monetary conditions against the backdrop of stalling inflation pressures and anaemic growth. We remain fundamentally long USD/JPY with the 114 level as medium-term target.
US – China round two talks have started
Amid increasing geopolitical tensions in the Middle East (incl. UN talks), adding up with North Korean threatening of summit cancellation, the US government is strongly solicited in the last few weeks. After a first unsuccessful negotiation session in Beijing in an attempt to unblock the situation, China’s economic advisor, Liu He, is in visit in Washington to discuss the matter. The meeting is set to be hard since last week’s US trade representative requested China to cut a total amount of $200 billion trade surplus by 2020, enforce intellectual property protection and decrease technology subsidies, putting doubt on a rapid diplomatic talk resolution ($150 billion tariffs against China are expected to come into effect next Tuesday). In addition, Trump’s attempt to calm the situation by lowering ZTE penalty rapidly vanished since US lawmakers recently rejected ZTE trade ban easing plan.
Unsurprisingly, the first topics discussed during the second week of negotiations concern trade issues and will be focusing on Chinese imports, certainly in an attempt to increase US-agro product exports trade in the future.
Expected to increase in the mid-term (+1.48% month-to-date and +0.56% week-to-date), USD/CNY pair is currently trading at 6.3695, slightly decreasing and heading along the 6.3625 range in the short-term.
