JPY: Trade, geopolitics and safe haven - Rabobank

Jane Foley, Senior FX Strategist at Rabobank, explains that given the risk of trade tensions and geopolitical risk in the region they continue to expect safe haven demand to underpin the JPY and for the USD/JPY110 level to attract

Key Quotes

 “While protectionism can be supportive for some industries in some sectors, it remains a threat for world growth and risk appetite.  Trump has previously criticised both China and Japan for manipulating their respective currencies and, in tune with his election manifesto, last week Trump tweeted that the US could no longer tolerate massive trade deficits and job losses.  The timing of these comments suggests that Trump was laying out his bargaining position ahead of this week’s meetings with his Chinese counterpart.  China’s Vice-Foreign Minister fired back saying that China does not have a policy to devalue its currency and neither does it seek a trade surplus with the US.”

“In January the US-China Business Council released a report suggesting that the US-China economic relationship supports 2.6 mln jobs in the US across a range of industries and that the US trade deficit with China was on course to drop as the Chinese middle class grew.  It also argued that the size of the imbalance is overstated due foreign produced components.  In addition China can argue that cheap Chinese imports reduce living costs considerably for US families and that it has been intervening heavily in recent months to stop the value of its exchange rate from falling.” 

“The February 10 press conference between Trump and Abe brought pledges of economic cooperation in addition to close security and appeared to alleviate some concern regarding the trade relationships between the two countries.  It followed reports that Japan’s GPIF public pension fund would be making large investments in US infrastructure development and that Japan is also prepared to increase its US shale gas imports.  However, on February 24 Reuters reported that in January Japan paid nearly twice as much for LNG derived from US shale gas as it did for its cheapest LNG imports from Angola.  Price could constrain the growth of US energy imports from the US going forward.”

“This month’s meeting’s between Aso and Pence could shine further light onto how far the Japanese government is willing to compromise with the US administration in order to dilute the threat of US protectionism and trade spates.  Given the risk of trade tensions and geopolitical risk in the region we continue to expect safe haven demand to underpin the JPY and for the USD/JPY110 level to attract.”