The Japanese yen has started the week with losses. Currently, USD/JPY is trading at 111.28, up 0.48% on the day. On the release front, Japan’s trade surplus was unexpectedly strong at JPY 0.55 trillion, crushing the estimate of 0.11 trillion. In the US, the sole event is a speech from FOMC member Raphael Bostic. On Tuesday, the US releases the Richmond Manufacturing Index. Japan will publish BoJ Core CPI and Flash Manufacturing PMI.

After weeks of an escalating trade war between the US and China, there was a breakthrough of sorts on Sunday. The US dollar has posted gains after Treasury Secretary Steven Mnuchin announced that the two sides had made significant progress and the trade war was being ‘put on hold’. Just last week, the White House sounded pessimistic about a deal being reached with China. The two economic giants had traded stiff tit-for-tat tariffs in recent weeks, worth billions in trade. These moves had raised fears of a bilateral trade war between the two largest economies in the world. The respite in tariffs means that the US can sit down with the Chinese and discuss the US trade deficit with China, which President Trump has long complained is a result of a non-level playing field with China. The news that the sides had backed down sent stock markets higher, and traders will likely be greeted with gains when European markets reopen on Tuesday.

Is the Bank of Japan looking to exit from its ultra-accommodative stimulus program? The cautious central bank will certainly move carefully. Any steps will be small and incremental in nature, in order not to rattle the markets or the yen exchange rate. The bank took one such step in April when it removed a deadline for hitting its inflation target of around 2 percent. Currently, BoJ policymakers are looking to raise bond yields from their near-zero levels as part of normalizing monetary policy. The stimulus program was introduced in 2013, when a confident BoJ Governor Kuroda claimed that he would reach the inflation target within two years. Fast forward to 2018, and the inflation target remains elusive, despite the bank spending trillions of yen in stimulus. The Japanese economy has shown some improvement, which will make it easier for the BoJ to exit from its radical easing policy. Still, traders should be prepared for small, incremental steps towards this end.

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