RIsk sentiment shift saved the BOJ from verbal intervention - for one day only.
USD/JPY given respite
On Tuesday there was a hefty option level at 105.00 on the USDJPY pair which kept the downside limited in the pair. However, the main event was when the Trump administration stated that they would delay the 10% tariff on some Chinese imports until December 15. The list of items to be delayed included cell phones, laptop computers and some items of footwear and clothing. On the back of this announcement we have seen the market switch from a risk off footing with JPY and CHF weakening while commodities and equities strengthened on the news. Yesterday I was expecting buyers on dips on the USDJPY pair as that market mood remains. The mood shifted by mid-morning (Justin kept up his usual excellent vigil across the equity and bond markets flagging the shift nice and early to Forexlive.com readers) and the weak JPY started to strengthen again. USD/JPY is currently around 105.92.
Bank of Japan seen ready to ease
Yesterday Eamonn posted on JP Morgan's report that they consider that the Bank of Japan has shifted to a 'pre-emptive easing stance' and that the 'BOJ is now willing to ease in response to risks of weakening momentum, rather than waiting for hard evidence'. Reuters reported that 30 out of 38 economists see the BOJ's next move as being ready to ease policy. The 100 level is seen as the 'line in the sand' level at which the BOJ will be ready act. The sub 105 will see verbal intervention.
USDJPY strength for now
I started writing this article yesterday and I said then, ' for now, we are seeing USD/JPY strength, but the reasons for the mildly conciliatory tone from the US are unclear. Was it the falling US stocks? Probably. So, I am sceptical about the longevity of this 'peace'.' That turned out to be a very short 'peace' indeed as the market went into full risk off mode.
Trump deals in a stressful way
Trump just does deals in a stressful way. Think of the NAFTA agreement and how that was eventually arranged, albeit with plenty of drama along the way. So, this is in keeping with Trump's style and I believe he does want a deal with China and that this is not purely posturing although elements clearly are and have to be by the nature of the disagreement (public and on twitter!). I mean imagine having an argument with your wife/husband via a public social media platform. Hardly conducive to easy reconciliation ;-). Yet, Trump has a kind side that it not given credit, like the time that he refrained from retaliating against Iran because some Iranian civilians might die. This is a man with an eye for the little man and as my father always used to tell me, 'make sure you look out for the little guy'. I guess that suited him pretty well being a 5ft 3in Irish man. So, I am expecting a deal, but not just yet and we know that Trump loves tariffs because they work and he can tell the US that China is paying the tariffs. Its a political win-win. FOr now we have to keep playing the risk -off and risk -on ping pong. Just keep taking quick profits on Trump's good days, as the bad days are sure to come until a deal is actually finalised.
So, watch for the threats of more tariffs, risk off sentiment to continue (with JPY and CHF strength, naturally) and with USDJPY sub 105, some jawboning on easing from the BOJ. Of course, Trump is going to love that one too, so watch out for the Trump retaliation (vIa Twitter of course) about the Central Banks and their 'currency wars'. You just know Trump is bombarding the Fed, 'Why can't we join the a currency war Jay?". I want one...