U.S. President Donald Trump has intensified trade tensions by signing an order imposing new tariffs on imports from Canada, Mexico, and China. The tariffs, set to take effect on Tuesday, will levy 25% on Canadian and Mexican goods and 10% on Chinese imports. This move has sent ripples through the market, causing the Japanese Yen (JPY) to lose ground against the U.S. dollar for the second consecutive day, amid concerns over the impact of these tariffs.
The tariffs come at a time when the US-Japan yield differential is hovering near a multi-week low, adding pressure on the Japanese Yen. The JPY's decline is exacerbated by recent discussions among Bank of Japan (BoJ) policymakers about potential interest rate hikes. Tokyo's core inflation has risen at its fastest annual pace in nearly a year, keeping market expectations high for further interest rate adjustments by the BoJ.
Spot prices are seeing significant movement as a result of these developments. They have edged closer to a two-year low previously touched in January. The protective 155.00 psychological mark is currently staving off immediate downside pressures, while the 154.55-154.50 horizontal zone and the 154.00 round figure offer additional support.
Canada, Mexico, and China collectively account for 42% of total U.S. imports as of 2024. The newly imposed tariffs are expected to have substantial implications for trade relations and market dynamics. The U.S. dollar has rallied across the board, advancing closer to its over two-year high touched earlier in January. This resurgence in the USD is supporting the USD/JPY pair, building on gains made last Friday.
The recent decline in U.S. Treasury bond yields presents a challenge for USD bulls, potentially limiting aggressive bets and capping gains for the USD/JPY pair. The narrowing US-Japan rate differential might also play a role in constraining the pair's upward movement.
In Japan, the BoJ's Summary of Opinions, released earlier on Monday, indicates that there is an ongoing discussion about the possibility of raising interest rates further at the upcoming January meeting. This conversation is fueled by rising inflation in Tokyo, which suggests that further monetary tightening could be on the horizon.
The market's reaction to Trump's tariffs is reflective of a broader risk-off mood. This sentiment could limit losses for the safe-haven JPY despite its current weakness against the USD. Market participants are closely monitoring how these tariffs will impact global trade dynamics and currency fluctuations in the coming weeks.