The USD selloff sent ripples through the global market, igniting a surge in the Japanese yen. Traders eagerly embraced the Bank of Japan's (BOJ) tightening policy, propelling USD/JPY downward, with expectations of testing the 153.00 threshold in Asian trading on Wednesday. This market upheaval coincides with significant developments in the trade war, as President Trump announced a one-month delay on the 25% tariffs for Canada and Mexico. This action adds a layer of complexity to the already volatile currency markets.
Market participants have their eyes set on the impending US jobs data, which will further influence currency movements. The recent JOLTS report revealed 7.6 million job openings in December, underscoring the strength of the US labor market. Despite this, USD positioning remains stretched, with traders hedged rather than unwinding dollar longs. Meanwhile, anticipation of Chinese stimulus in response to trade tensions helps stabilize the yuan amidst disappointing economic data.
The yen's rally is further fueled by growing speculation on BOJ policy shifts. December saw an increase in Japanese real wages, lending support to expectations of future rate hikes by the BOJ. This bolstered confidence among traders, prompting them to adjust their positions in favor of the yen. The RBA-Fed policy divergence also plays a crucial role in these currency dynamics, reflecting contrasting monetary policy trajectories between major economies.
China's economic indicators add another dimension to the market landscape. January's Caixin Services PMI fell short of expectations, highlighting a slowdown in service activity. This comes amid ongoing trade tensions, with markets bracing for potential impacts on China's economic growth. The US Postal Service's decision to halt all inbound packages from China and Hong Kong, except for letters, further complicates trade dynamics and underscores the growing economic strain.
President Trump's decision to delay tariff implementation serves as a temporary reprieve but underscores the uncertainty surrounding trade negotiations. The April 1 tariff review looms as a critical juncture, keeping the Trade War Premium embedded in the dollar. Market participants remain cautious, closely monitoring developments that could sway currency valuations.