The Japanese yen rally continues to climb this week. In Wednesday’s North American session, USD/JPY is trading at 112.20, down 0.24% on the day. Earlier in the day, the pair dropped to its lowest level since late October. On the release front, Japan’s trade deficit widened for a fourth straight week, ballooning to 0.49 trillion yen, much higher than the previous month’s deficit of 0.30 trillion. The estimate stood at 0.31 trillion yen. In the U.S., there are no major indicators. The spotlight is on the Federal Reserve, which is expected to raise rates to a range between 2.25 and 2.50 percent. The Bank of Japan will also set interest rates and release a rate statement.
The U.S. dollar is broadly weaker on Wednesday, ahead of the Federal Reserve rate statement and anticipated hike in interest rates. With the U.S. economy showing signs of cooling and equity markets enduring a dismal December, the markets are expecting a dovish message from policymakers. A rate hike, which would be the fourth of the year, is widely expected, but a hike is certainly not a shoo-in. Just one week ago, the CME Group had set the odds of rate hike at 80%, but this has fallen to 69%. The Fed usually avoids rate hikes when the markets are in turmoil, so policymakers may “compensate” the markets with a dovish statement, while delivering a rate hike. This concoction could shake up the U.S dollar, so traders should treat the Fed statement as a market-mover.
The BoJ is expected to maintain rates at its meeting on Wednesday. Investors will be closely attuned to the tone of the rate statement, which is expected to be dovish, as the global trade war continues to take a toll on the Japanese economy. Japanese Final GDP in Q3 declined 0.6%, the second decline in three quarters. The well-respected Japanese Tankan Manufacturing index remained steady at 19 points in the third quarter. However, recent manufacturing indicators have pointed downwards, pointing to slower activity in the manufacturing sector. This is attributable to slower global economic conditions, which has taken a bite out of Japanese exports and manufacturing. With Japanese exports to the U.S. and China facing higher tariffs, it’s not surprising that recent manufacturing reports have been soft.
