USD/JPY has posted modest gains in the Wednesday session. In North American trade, the dollar is trading at 109 yen. In economic news, there are no major US events on the schedule. In Japan, the trade surplus is expected to dip to JPY 0.61 trillion. On Thursday, the US releases the Philly Fed Manufacturing Index and unemployment claims. As well, US Treasury Secretary Steven Mnuchin will speak at event in Washington.
US vice-president Pence is in Tokyo for talks with Japanese officials. High on the agenda are bilateral trade relations as well as the simmering crisis in North Korea. On the trade front, the US administration is pushing for a free trade agreement with Japan, after President Trump pulled the US out of the Trans-Pacific Partnership, a regional free-trade agreement which was strongly supported by Japan. Trump has complained about the large trade deficit that the US has with Japan, and has criticized Japan for manipulating its currency for trade purposes. Trump wants the US to have greater access to Japanese markets and is looking for Japanese investment to help fund his infrastructure program. North Korea has been a flash-point in recent weeks causing volatility in the markets as the war of words between the US and North Korea has escalated, with North Korea warning it will respond with a nuclear strike if attacked by the US. The crisis has been bullish for the safe-haven Japanese currency, which has climbed 1.9% in April.
The Federal Reserve has broadly hinted that it plans two more rate hikes in 2017. There have been calls from some Fed policymakers to raise rates three more times, but this seems unlikely, given disappointing retail sales and CPI numbers in March. These weak numbers are likely to make the Fed more dovish, and prompted the Atlanta and New York Federal Reserve banks to lower their outlook for US economic growth for the first quarter of 2017. The Fed can point to a labor market that is close to capacity as well as strong consumer confidence, but this has not translated into stronger consumer spending, a key driver of economic growth. What can we expect next from the Fed? The odds of a rate hike in June are currently priced at 55%, according to the CME Group, down from 65% earlier in April.
