Sat, Jun 10, 2023 @ 17:53 GMT
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Yen Hugging 113 as US Markets Off for Holiday

The Japanese yen is almost unchanged at the start of the week. In the Monday, session, USD/JPY is trading just above the 113 line. On the release front, Japan’s trade surplus fell sharply to JPY 0.16 trillion, well short of the forecast of JPY 0.28 trillion. This marked the smallest surplus since January 2016. Later in the day, Japan releases two minor events, Flash Manufacturing PMI and All Industries Activity. US markets are closed for Presidents’ Day, so we’re unlikely to see much movement from the pair.

After Fed Chair Janet Yellen’s upbeat take on the US economy, the markets are keen to review the Fed policy minutes, which will be released on Wednesday. Testifying before Congress last week, Yellen noted that inflation is moving towards the Fed’s 2 percent target, the labor market remains red-hot and consumer spending is strong. Yellen strongly hinted that a rate hike was imminent, leaving the markets to speculate if the Fed prefers to make a move in March or June. If the US economy stays on track in 2017, analysts expect two or three rate hikes of a quarter-point. At the same time, the Fed wants to take into account the economic stance of the new administration, but this remains an elusive goal. Donald Trump continues to have difficulty filling in key cabinet positions and the media continues to probe connections between Trump officials and Russia. Trump has fired back by bitterly attacking the media, and lost in the mayhem is a clear and coherent economic policy. Although Trump has been in office for just over a month, the perception of a muddled and disoriented White House is creating uncertainty in the markets, and is, as Trump would say, "bad for business".

Japan’s economy is on a modest upswing. GDP has expanded over four consecutive quarters and inflation continues to point upwards, although it remains well below the BoJ target of two percent. At the same time, the new Trump administration could pose a serious challenge for Japan. Trump has paraded the motto of "America first" and withdrew the US from the Trans-Pacific Partnership, a trade agreement in which Japan is a major partner. Trump has charged that Japan is manipulating its currency to gain an unfair trade advantage, and this disputed threatened to sour the recent meeting between Prime Minister Shinzo Abe and Trump in Washington. However, the potential crisis was quickly defused, as the two leaders agreed that their finance ministers would conduct bilateral talks to discuss currency policy. Abe has dodged a bullet for now, but if USD/JPY pushes above the 120 level, the war of words over exchange rates could be renewed. Trump remains concerned about the huge US trade imbalance with Japan and will want to make changes in the US-Japan trade relationship. Japan is heavily dependent on its export sector, and any protectionist moves by the US, such as import taxes, could hurt the Japanese economy.

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