In currency markets, US-Japan summits back on the radar
The last time dollar-yen traders were this focused on a US-Japan summit may have been back when Bill Clinton and Kiichi Miyazawa haggled over trade tensions at a sushi dinner.
Just like in the early 1990s, trade tensions are back on the bilateral agenda, after President Donald Trump levelled charges a weakening yen makes for unfair Japanese competition. Trump sits down with Prime Minister Shinzo Abe for two days starting Friday, offering an event risk traders won’t want to ignore.
Investors already have been paring bets on dollar gains versus the yen after Trump in his first three weeks in office focused on protectionist moves and immigration bans rather than pushing the reflationary policies that had spurred a rally in US assets.
Trump has pulled out of the Asia-Pacific trade deal backed by Abe, singled out Japan for failing to buy US cars and called the bilateral vehicle-trade imbalance “unfair.” He also accused Japan, along with China and Germany, of devaluing its currency.
“It is all about how Trump will make an issue out of the trade imbalances, so the focus is on whether Japan can convincingly answer these largely unjust charges,” said Daisuke Karakama, chief market economist in Tokyo for Mizuho Bank Ltd. “The yen will weaken if the meeting ends in a friendly tone, and strengthen if the US takes a tough stance on currency and trade issues.”
While America’s trade imbalance has improved somewhat, it’s still large in dollar terms. The country logged a trade deficit of US$734.3 billion in 2016, US data showed. The shortfall with China was the biggest, at US$347 billion, followed by Japan’s US$68.9 billion. And history shows episodes when investor focus on protectionism and the US deficit has hammered the dollar.
In 1993, when Clinton pushed Japan with his get-tough approach and wrestled a trade accord out of Miyazawa, half of the US trade deficit was accounted for by Japan. With Clinton administration officials signalLing a preference for a stronger yen that year, the dollar tumbled 10 per cent. By 1995, the dollar hit a postwar low against the yen.
“It is undignified of a US president himself to talk down the currency at current levels, but such is the case with Trump administration,” said Satoshi Okumoto, Tokyo-based chief executive officer and president at Fukoku Capital Management Inc. “Anybody who recalls the Miyazawa-Clinton relationship can remember how a US president’s reaction can have a huge impact on markets.”
Trump’s criticism about devaluation sent the yen up last week. Having already shot that salvo, odds for further harsh rhetoric at the summit might be reduced, according to Kyosuke Suzuki, head of foreign exchange and money-market sales at Societe Generale SA in Tokyo.
The concerns raised in the lead-up to the summit may set the dollar up for a relief rally Monday if the meeting goes smoothly, Suzuki said. He saw upside at most around 114 to 115 yen. In the event of yen buying, 111.30 is the first line of support, he said.
“Trump already effectively made it difficult psychologically to aggressively sell the yen, so I don’t expect anything unsettling for markets -- he may come out with moderate requests on selling U.S. cars in Japan, or investing in America to create jobs,” Suzuki said.