Remarkable strength of the Japanese yen contributed to the wide appreciation. It has won for the second straight day after a difficult start to the week. Japan’s yen regained some ground after suffering a 2.1% drop on Monday’s trading. During the North American session, the USD/JPY currency pair was changing hands at 146.32, down 0.79% on the day. The currency pair recently fell through important support levels of 147.06 and 146.64. Traders are focused on 145.91 as a new support target.
Japan and the United States are deeply involved in intense round-the-clock negotiations. As Japan’s fifth largest foreign direct investor, the US has $165 billion in direct investment in Japan. A confluence of recent economic trends is re-molding the arena. Inflation rates and the recent tariff agreement between the US and China have combined to foster an air of optimism for possible trade deals.
Currency Fluctuations and Economic Factors
The ongoing volatility in the USD/JPY currency pair has further illustrated the challenges and unintended consequences inherent in global economic interdependencies. The currency pair has fallen through several important support levels. Market analysts are currently looking at the next resistance levels at 147.79 and 148.21. These levels will be key as market participants and traders test the new-found strength of the yen v dollar.
The yen’s sharp rebound has been blamed on a variety of factors, including Japan’s inflation figures for April coming in below economists’ expectations. Year-on-year wholesale inflation remained high at 4%. That is an improvement from recent months, a sign that businesses are continuing to absorb and/or pass on higher prices of their own to consumers. Some of the most alarming effects have been seen in food prices, with rice prices doubling within the past year in some markets.
Despite these recent advances, a degree of wariness persists among market watchers. The complete effect of the recent trade agreements’ tariffs may not even be fully realized until June or July. Taken altogether, these changes could have a major impact on rising long-term inflation and dollar value.
Trade Relations and Impacts
The trade discussions that continue to take place between the US and Japan are imperative to determining the positive economic direction for the two countries. Japan’s economic recovery is deeply dependent on exports to the US. With this likely impact, any new trade agreements can have an immense effect on currency valuations and overall economic stability within the country. The roundtable discussions take place against the very real backdrop of increasing trade tensions around the world, and especially with China.
Markets are reacting positively to news of a newly negotiated 90-day tariff truce between the US and China. Investors are hoping that President Trump will soon pursue the same kind of arrangements with other trade partners, including Japan. This all potentially positive mood could further currency moves in the coming weeks. Traders will be waiting and watching with bated breath for moves from these negotiations.
Federal Reserve’s Stance and Future Considerations
During last week’s Federal Reserve meeting, Fed Chair Jerome Powell answered the President Trump’s call to lower interest rates. Further, he stressed a more cautious approach to monetary policy in general. Such a stance would upend the entire currency markets. Investors will have to do a double take on investor outlooks for the US dollar and Japanese yen going forward.
As traders deal with these always changing economic conditions, the focus will remain on what goes on at home and abroad. Trade negotiations, inflation data and central bank policies—all are part of the same equation. These factors will be the key drivers of currency valuations in the immediate term.