Here’s why trade-war fears trump the Bank of Japan when it comes to the yen
The Japanese yen would have been expected to weaken on the Bank of Japan’s cautious policy update, but instead it defended its modest gains against the dollar, as traders deemed trade war fears more important the ultraloose BOJ status quo.
The yen is not just any currency, but one of the world’s favorite havens in times of volatility and uncertainty. On Friday, the U.S. announced new tariffs on Chinese imports, and in turn China promised to retaliate, sending ripples through currency markets. Fears over trade wars stem from the potential hit global growth.
“U.S. and China ‘tariff’ cries usually mean that it’s time to buy the yen,” wrote Viraj Patel, FX strategist at ING earlier. With more tit-for-tat trade rhetoric on deck, “expect dollar-yen topside to run out of steam,” Patel said.
The greenback dipped a modest 0.1% against the yen, buying ¥110.55, compared with ¥110.63 late Thursday in New York, not a big move, but nonetheless notable given the central banking backdrop.
All things being equal, a dovish central bank should make for a weaker currency, and by downgrading its inflation forecast from earlier in the year, the Bank of Japan appeared to further delay the prospect of monetary tightening. The Japanese central bank is widely accepted to be the most dovish out of the major developed market central banks, sitting opposite the Federal Reserve, which continues on a policy-tightening path that’s seen it raise rates seven times since December 2015 and begin shrinking the massive balance sheet it acquired in the aftermath of the financial crisis.
“Surveys suggest that the vast majority of participants do not expect any measures toward normalization until after 2020, after the impact of the October 2019 sales tax increase can be assessed,” said analysts at Brown Brothers Harriman, in a note.
The “BoJ still seems unlikely to even consider altering its stimulus program anytime soon, which in isolation, is a factor arguing for a weaker yen from a relative rates perspective, especially against currencies of nations who are normalizing policy, like the dollar,” said Andreas Georgiou, analyst with brokerage XM.
The Fed raised interest rates by 25 basis points to 1.75%-2% on Wednesday, increasing the difference between rates in the U.S. and Japan further, which market participants expect to point to a stronger dollar against the yen USDJPY, -0.07%
Don’t miss: Here’s how the ECB just breathed new life into the dollar rally, analysts say
Indeed, the yen was weaker versus other major currencies like the euro EURJPY, +0.32% or the British pound GBPJPY, +0.11% on Friday, isolating its strength against the greenback.
Anneken Tappe is a markets reporter for MarketWatch. She is based in New York.
We Want to Hear from You
Join the conversation
NY Stock Exchange