Geo-politics, Macroeconomics and the Dollar – Yen

It may be too early to begin talking of a great divide between the East and the West, but if recent trends in the Dollar are anything to go by, the uncertainty over the U.S administration’s foreign trade policies appear to be weighing more heavily on risk sentiment in the East than in Europe and the U.S.

For now this is perhaps justified, the U.S president having targeted not only the Chinese and the weakness of the Yuan, but also the Japanese. Once an economy with strong U.S government backing, Trump’s latest commentary including suggestions, perhaps more direct than merely suggestions, that Japanese car makers adopt unfair trade practices.

The fact that Trump has yet to step back from the strong position on protecting the U.S will be all the more worrisome for Japanese exporters. The BoJ and the Japanese government having embarked on a mission to pull back strength in the Yen for the most part of last year with monetary policy and threats of government intervention ultimately failing, the weakness in the Yen coming off the back of positive sentiment towards the U.S economy, which was and to a certain extent remains supportive of global growth, assuming that common ground is found between Trump and world leaders, Prime Minister Abe’s visit to Washington in a couple of weeks of particular relevance to the region.

If the noise over the weekend is anything to go by, following the President’s executive order to temporarily block entry of certain nationalities into the U.S, the accusations of unfair trade will need to be taken seriously, not just by the respective governments at the mercy of the U.S, but also the financial markets.

The Yen rallied by as much as 0.72% through the Asian session, hitting a high of ¥114.27, with lighter volumes due to the Chinese New Year, adding to the upside for the safety of the Yen, while we have seen some softening in appetite as the markets moved towards the European open. The yen is currently trading at 114.66 down 0.37%.

Should the U.S president make further progress on returning manufacturing to the U.S, the question will ultimately be whether exporters see Trump’s philosophy and model one that will live beyond Trump’s presidency.

If this is the case then a migration of not just auto, but production in general, to the U.S would certainly be a viable option for Japanese exporters, particularly when considering the fact that the U.S is the largest export market for Japan, while China is considered the largest trading partner, imports from the U.S paling into insignificance relative to exports.

While approximately 70% of Japanese cars sold in the U.S are actually U.S made, a reliance on exports to the U.S remains key to the Japanese economy and other economies within the region.

The upside in the Yen through this morning’s session is certainly justified, though with so much at stake, one does wonder whether the appetite for the Yen is truly reflective of the circling headwinds to Asian economies, Trump’s withdrawal from the TPP a sign of intent.

European markets may have a more pragmatic view on the outlook, which likely provides the reason behind a softening in the Yen as the European open approached, Trump having shifted ground on his position on trade with Mexico at the end of last week, following a telephone conversation between the two leaders.

Whether there is a pragmatic view or not, a different sentiment towards geo-political risk is apparent across regions and whether there will be any divide remains to be seen, with what lies ahead largely dependent upon how the U.S administration progresses on trade talks with the EU and the UK, without forgetting Africa and the Middle East.

While the early part of the day has seen financial markets respond to the noise from the Oval office, macroeconomic data out of the U.S this evening will provide direction for the Dollar. The FED’s preferred inflation indicator, the Core PCE Price Index, and personal spending figures for December scheduled for release, the markets looking for upbeat data to be in a position to brush aside the weaker than expected GDP figures last Friday, and attempt to gauge the timing of a first rate hike by the FED, though with so much noise from the White House, the usual obsession over the FED and timings have yet to materialize.

From a macroeconomic data perspective, the Dollar is expected to find some inroads should the figures be in line with or better than forecast, though as we have seen in recent weeks, any material upside may be muted by what looks to be reduced appetite for the Dollar through periods of rising geo-political risk. Trump now the brewer of the global political storms building.

The Yen slid to a low of ¥114.936 on the European open, the day’s gains easing to just 0.14%, while at the time of the report, the Dollar/Yen stood at ¥114.66, down 0.35% on the day, with the Dollar Spot having recovered from an Asian session low of 100.17 to 100.52, representing a decline 0.04% at the time of the report, as appetite for the Dollar returned ahead of today’s stats, though even the European markets seem less convinced over the latest executive order.