USD/JPY has paused in Tuesday trade, after posting strong gains on Wednesday. In the North American session, the pair is trading at 110.51, up 0.11% on the day. On the release front, Japanese services and manufacturing reports indicated contraction. In the U.S., JOLTS Jobs Openings sparkled, climbing to 7.33 million.
Japan’s economy is struggling, as underscored by Tuesday’s releases. Tertiary Industry Activity, which measures the value of services purchased by businesses, fell 0.3%, its third decline in four months. There was no relief from Preliminary Machine Tool Orders, which plunged 18.8% in January, marking a fourth successive decline. With Japan continuing to post soft data and the BoJ continuing its easy monetary policy, the yen will be hard pressed to attract investors, unless risk apprehension shoots higher.
Japan is heavily reliant on trade with the U.S. and China, so the U.S-China trade war remains a significant concern for policymakers. Although the sides are talking, markets slipped after President Trump that he would not hold a meeting with President Xi prior to the March 2 deadline, when the U.S. is set to impose further tariffs if the sides fail to reach a deal. A third round of negotiations starts this week, with Treasury Secretary Mnuchin joining the talks later in the week. Still, with no signs of progress, there is growing alarm that the sides will not be able to reach a deal by March 2.
The Federal Reserve pressed the rate trigger four times in 2018, as the Fed responded aggressively to a red-hot U.S. economy. However, the global trade war and slower U.S. growth has resulted in the Fed lowering its forecast to two hikes in 2019. This could be overly optimistic, as the rate futures market has forecast no rate hikes until 2020. On Monday, Fed President Michelle Bowman said that she was satisfied with current monetary policy, and that the labor market and inflation levels had put the economy in a “good place”.
