USDJPY: Concerns Trump Administration will target Japan next with trade rhetoric 

02 October 2018 : The USDJPY unexpectedly challenged 2018 highs above 113 towards the end of September, in spite of the Dollar index declining towards its lowest level in three months during the same period and as emerging markets remain rattled by external uncertainties leading to fears that some are suffering from a currency crisis. 

This shift in weakness for the Japanese Yen didn’t get the attention it deserves in the headlines due to the ongoing focus around global external uncertainties, but it is a significant surprise that the Yen dropped to milestone lows at a time when you would usually expect the Yen to remain as a safe-haven asset for investors. 

Analysts do not think the trend of Yen weakness is a deliberate measure from officials in Japan, because the Dollar has also clobbered the Swiss Franc and Gold during the same period of Yen weakness. It would not be a surprise if investors are proactively selling the Yen on concerns that Japan could be the next target of President Trump for trade tariffs. Reports have circulated since early September that the Trump Administration is considering directing the trade rhetoric towards Japan while Washington remains in deadlock with Beijing around the same narrative, and that President Trump might have used the recent visit of Japanese Prime Minister Shinzo Abe to the United States as an opportunity to push the trade agenda. 

From the aspect of the Bank of Japan, policymakers are likely to be content to see an emerging trend of Yen weakness because it has been widely speculated that officials would prefer to see the return of a weaker Yen. Hesitance from the Japanese central bank to lift the monetary policy outlook for anticipation of higher Japanese interest rates over the long-term remains a pull towards maintaining a negative bias on the Yen over the longer-run. However, I would keep an eye on whether the safe-haven appeal for the Yen could return in the lead up to the U.S. mid-term elections in November. 

We have seen time and time again in recent history, and specifically when there is market uncertainty around political risk, that investors are incredibly loyal to the Japanese Yen, and I am not buying into the near-term price action suggesting that the Yen has lost its safe-haven status. 

Loyal investors of the Yen might also consider potential selling positions when the USDJPY rallies. I would expect the Yen to fluctuate if the Trump Administration redirects attention later down the road towards talking down Greenback strength.

The technical outlook suggests that 113 in the USDJPY remains as a key point of interest for traders. I would personally like to see the pair close above this level on a monthly basis, to buy into the trend that more Yen weakness is upon us. The weekly timeframe also suggests that 113 in the USDJPY will continue to act as a barrier to prevent the pair from extending even higher in the short-run. 

Ambitious USDJPY investors might overall be tempted to price in an eventual return to 115 in the pair if the USDJPY can conclude above 113 on a monthly basis.

November will likely provide the heaviest round of political risk in financial markets this year, considering that this is when the US mid-term elections will take place. 

If the USD sells off on comments from the Trump Administration that the Dollar is too strongly valued, or that the outcome of the mid-term elections might provide a stumbling block to President Trump implementing his America First agenda, this is where investors will likely consider bearish positions in the USDJPY. 

By Jameel Ahmad, Global Head of Currency Strategy and Market Research at FXTM 

AUDUSD: Navigated by global trade tensions 

The drivers behind the Australian Dollar’s rocky depreciation during Q3 mostly revolved around ongoing global trade disputes and widening interest rate differentials in the United States.

Market fears were elevated over a tit-for-tat tariff battle between the U.S. and China adversely impacting global growth, emerging markets and export-dependent nations. With China accounting for almost a third of Australia’s exports, any possible slowdown in economic momentum represents a threat to demand for Australian commodities. While trade tensions were a significant drag on the Aussie, rising interest rates elsewhere compounded to downside pressures. With the Federal Reserve on a path towards gradually normalizing monetary policy and the Reserve Bank of Australia (RBA) maintaining a “wait and see” approach, the AUD remains a victim of widening interest rate differentials.

As we head into the final trading quarter of 2018, the Australian Dollar is likely to remain impacted by global trade developments, the Dollar’s performance, monetary policy and commodity prices.

The AUD remains at threat of depreciating further if escalating U.S.-China trade tensions transform into a full-blown trade war. Such an unfavorable development may trigger global risk aversion, punish export reliant nations and pressure commodity prices – all of these are negative for the Australian Dollar. While the domestic conditions in Australia have improved with growth expanding at the fastest pace in 6 years during Q2 at an annualized 3.4%, the nation still remains in the firing line of trade disputes. With anemic wage growth and subdued inflation at home providing a solid argument for the RBA to leave interest rates unchanged at the record low of 1.50%, the Australian Dollar’s outlook points to further downside.

With Australia being the world’s second largest producer of Gold, investors should keep a close eye on the yellow metal which tends to be positively correlated with the Australian Dollar. The past few trading months have certainly not been kind to Gold prices and this may impact the Australian economy during the final trading quarter of 2018. With the zero-yielding metal currently entangled in a losing battle against the Dollar and Fed hike expectations, the Australian Dollar seems to be instore for more pain and punishment down the road.

In regards to the technical picture, the AUDUSD respected a bearish trend during the final trading quarter of 2018 with prices sinking to levels not seen in over two years below 0.7100. With the Aussie’s weakness the product of trade tensions, widening interest rate differentials and falling Gold prices, the AUDUSD remains bearish fundamentally. A monthly close under 0.7150 could inspire a decline towards the 0.7000 psychological level and possibly 0.6820.

There have been consistently lower lows and lower highs on the weekly charts while the MACD remains firmly planted to the downside. For as long as the AUDUSD is unable to break back above the 0.7330 level, prices could challenge 0.7150 and 0.7000, respectively. Zooming into the daily timeframe, the AUDUSD experienced a technical rebound towards the 0.7310 region before bears dived back in to send prices lower. A solid daily close below 0.7200 could be the catalyst needed for a further selloff towards 0.7150. If the downside momentum shows no signs of cooling, prices are likely to test 0.7090. In an alternative scenario, a breakout back above 0.7450 needs to be achieved to invalidate the current bearish setup.

By Lukman Otunuga, Research Analyst at FXTM

Reporting for EasyKobo on Tuesday , 02 Octber 2018 in Lagos, Nigeria