The strong yen hurt Japan’s trade balance in July, and Fed speakers followed suit

Analysis of the Japanese Yen (USD/JPY).

• Japan’s trade balance in July was likely affected by a significantly stronger yen
• Economists and market participants expect another rate hike this year
• Continued bearish USD/JPY may get a helping hand from the Fed

Japan’s trade balance in July would likely be affected by a significantly stronger yen

Japan’s trade balance in July was worse than expected, but the deficit was about half of what was seen in May and about a third of what it was in January. Imports in July rose more than expected, while a stronger yen may have weighed on exports, which were lower than expected.

The deficit has raised some doubts about Japan’s economic recovery, but trade balances have proven to be highly inconsistent, typically rising one month and falling the next. After contracting by 0.6% in Q1, the Japanese economy expanded by an impressive 0.8% in Q2 of this year, supporting recent moves by the Bank of Japan to raise interest rates to more normal levels.

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57% of economists polled by Reuters anticipate another interest rate hike in December this year. This is on the back of two previous hikes, the most recent of which was a surprise 15 basis point (bps) increase that caught many market participants by surprise. Now the market is pricing in 6 bps from December, but that will likely depend on whether the US can avoid fears of a possible recession that emerged after the Fed voted against cutting interest rates in July, followed shortly by a worrisome hike of the unemployment rate. .

BOJ rate Expectations

Source: Refinitive, prepared by Richard Snow

Japanese yen falls after gloomy trade data

The Japanese yen fell in early trading, helped by disappointing trade statistics, with the Canadian and US dollars leading the way for now. It will not be surprising to see reduced movements ahead of the FOMC minutes and an expected downward revision of job gains between April 2023 and March 2024.

The combination of lower inflation, rate cut expectations and a weaker jobs market has contributed to the dollar’s steady decline, which could well continue if the FOMC minutes and jobs revisions paint a bearish picture . USD/JPY could therefore manage another leg lower after the recent consolidation.

The currency performance chart shows the depreciation of the yen in the shorter term

Source: FinancialJuice, developed by Richard Snow

USD/JPY’s continued bearishness could get a helping hand from the Fed

USD/JPY hit a low on Monday, August 5 as volatility increased as hedge funds rushed to cover carry trades. Since then, there has been a partial rebound as prices have pulled back, but ultimately there has been a continuation of the medium-term downtrend.

The US dollar came under strong pressure as weaker inflation and a worsening outlook for the labor market prompted traders to reduce dollar exposure as the Fed prepares for a much-anticipated rate cut next month. Jerome Powell’s Jackson Hole address this week will be watched with great interest. Speculation around a 25 or 50 bps cut continues to circulate, with markets attributing a 30% change the Fed will front-load the rate cut cycle.

The next level of support for USD/JPY is at the low of 141.70, followed by the December 2023 low of 140.25. With some time to go before a BoJ hike is expected, the catalyst for a further move lower in USD/JPY is more likely to come from the US, with the FOMC minutes, the jobs review and the Jackson Hole Economic Symposium taking place this week. . Resistance appears at the recent high at 149.40, followed by the 200-day SMA (red line) and the 151.90 level.

USD/JPY Daily Chart

Source: TradingView, prepared by Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX