The dollar/yen pair has been trading in the framework of the 109th figure for more than a week without leaving this price area. After falling in early January to a multi-month low of 104.48, the pair regained its position and was stuck in a fairly wide-range flat, waiting for new drivers. But recent events are controversial, so the Japanese currency does not have sufficient arguments for its growth. Moreover, after the January meeting of the Bank of Japan, the yen can only rely on an external fundamental background, whereas internal factors play only against the currency.
Let me remind you that at the first meeting this year, the Japanese regulator lowered forecasts for inflation. According to the Central Bank, core inflation in the next fiscal year (which begins in April) will grow by only 0.9%. These figures are clearly more modest than earlier forecasts. For example, in October, the regulator expected inflation to grow by 1.4%. This suggests that traders should not expect monetary tightening in Japan until the end of 2020. And although the market has not harbored "hawkish" illusions about the intentions of Haruhiko Kuroda for a long time, now we can finally put an end to this issue. Over the next two years, the Bank of Japan may change the parameters of monetary policy, except in the direction of easing, which is also a cautious rumor.
This fact has somewhat weakened the yen across the entire market, including paired with the dollar. However, the growth of USD / JPY was quite formal. The pair only "exchanged" 108 figure for 109. Dollar bulls were unable to take further steps, due to the softening of the Fed's rhetoric. As a result, we can observe the confrontation of two currencies, which are in a weakening stage. The end of this story will follow very soon. It is likely that by the end of this week.
The contradictory nature of the currency pair USD / JPY is that both the dollar and the yen are considered safe assets, so the influence of the external fundamental background can be interpreted by traders differently, depending on the combination of numerous nuances. For example, if we are talking about the escalation of the US-China trade war, in this case, the favor will be the US currency. The Japanese economy is too tied to the Chinese. For example, the IMF called the global trade conflict the main "culprit" in slowing down the main parameters of the island state. But the dollar, as a rule, "skims off" in the period of exacerbation of relations between Beijing and Washington (despite the fact that the conflict ricochets the US economy).
Today, a very unique situation has arisen. On the one hand, China and the United States resume trade negotiations, on the other hand, these negotiations will take place against the background of a growing scandal around Huawei and charges of violating anti-Iran sanctions. According to some experts, the "spy scandal" (we are talking about the theft of intellectual property) is deliberately inflated by Americans in the context of the upcoming talks. This factor will allegedly strengthen Washington's negotiating positions.
Nevertheless, both the American side and the Chinese pin great hopes on the upcoming visit of the delegation from the PRC. The meeting will be held at a "high" level, the host will include, inter alia, Finance Minister Steven Mnuchin, trade representative Robert Lighthizer and adviser to the American president on trade and industrial policy Peter Navarro. Then the Chinese delegation should accept Donald Trump, although this will depend on the outcome of the preliminary talks.
Almost all experts are confident that this week (negotiations begin on Wednesday) a key stage of the negotiation process will take place. The outcome of a broad trade deal between the US and China depends on its outcome. And it would seem that such prerequisites should strengthen the risk sentiment in the market. But, alas, there is another side to the coin. So, the States earlier this week sent a request to Canada for the extradition of the financial director of Huawei Meng Wanzhou. In response, the Chinese Foreign Ministry expressed a protest to the United States and Canada, demanding that they abandon such intentions. In addition, Beijing "to pieces and dust" criticized the recently adopted law to strengthen official contacts and military ties between the United States and Taiwan. In addition, the Chinese were unhappy that the States unilaterally imposed sanctions against Venezuela (Washington blocked the assets of Venezuelan oil company PDVSA for $ 7 billion).
In other words, the news background is clearly not conducive to a "warm friendly conversation". Negotiations will not be easy and it is almost impossible to predict their outcome. On the other hand, the dollar is under additional pressure from the Fed's pigeon attitude. If tomorrow Jerome Powell announces a decrease in the rate of collapse of the Fed's balance sheet (or at least hints about it), then greenback will increase its decline throughout the market, and a pair of USD / JPY will not be an exception here.
Thus, the currency pair dollar/yen is entangled in a tangle of fundamental factors that sometimes contradict each other in the context of the expected reaction of traders. In this situation, we can recommend not to hurry with short positions on the pair USD / JPY, if tomorrow's Fed meeting ends not in favor of the dollar. Nevertheless, for the traders of this pair, the outcome of the US-China negotiations, which we will learn closer to the end of the week, will be of greater importance.
The material has been provided by InstaForex Company - www.instaforex.com