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On April 3, CICC pointed out that Trump announced "reciprocal tariffs" on April 2, which exceeded market expectations. Reciprocal tariffs use a combination of "carpet-style" tariffs and "one country, one tariff rate", covering more than 60 major economies. Calculations show that if these tariffs are fully implemented, the effective tariff rate of the United States may rise sharply by 22.7 percentage points from 2.4% in 2024 to 25.1%, which will exceed the tariff level after the implementation of the Smoot-Hawley Tariff Act in 1930. CICC believes that reciprocal tariffs may increase uncertainty and market concerns and aggravate the risk of "stagflation" in the US economy. Calculations show that tariffs may push up US PCE inflation by 1.9 percentage points and reduce real GDP growth by 1.3 percentage points, although they may also bring in more than $700 billion in fiscal revenue. Faced with the risk of "stagflation", the Federal Reserve can only choose to wait and see, and it may be difficult to cut interest rates in the short term. This will further increase the risk of economic downturn and increase the pressure on the market to adjust downward.RBA Financial Stability Assessment Report: US tariffs may have a "chilling effect" on investment and spending.RBA Financial Stability Assessment Report: Australian banks are well capitalized and can absorb large loan losses. It is important that bank lending standards remain sound. Budget pressures are prevalent among Australian households, but are expected to ease. There are concerns that low interest rates will encourage households to over-indebtedness.RBA Financial Stability Assessment: The Australian financial system is in a good position to weather a severe global recession. Most households are in good financial shape and banks have limited the risk of widespread disruption.Reserve Bank of Australia Financial Stability Assessment Report: Risk aversion will increase financing costs and cause liquidity tightness.

The yen bullish trend may be gone, the dollar against the yen is expected to hit a nearly one-year high

Eden

Oct 26, 2021 10:52

On Friday (October 8), the U.S. Senate approved a temporary increase in the U.S. debt ceiling. The market’s improved risk sentiment pushed up U.S. Treasury yields and the U.S. stock market. The benchmark 10-year Treasury yield hit a four-month high. The yen was sold off for the second consecutive trading day, suggesting that the trend of USD/JPY retreat from the 19-month high set in September has ended. If the non-agricultural data performs well in the day, the currency pair is expected to hit the high point since 2020 in the market outlook.



Yen’s short-term correction may be over, non-agricultural data is expected to perform well


Undermining the attractiveness of the yen as a safe haven is the recent agreement between the Democrats and Republicans to raise the US debt ceiling. Before reaching an agreement, the market is worried that the US government may default on its current debt, which may cause a major chain reaction in the global market. Nevertheless, the yen bulls seized this opportunity to regain some of their losses. As global markets become more risk-seeking, the short-term correction of the USD/JPY price rally may be coming to an end.

At present, the market is eagerly awaiting the release of the key US employment report in September. Last month’s data was unexpectedly weak. This time the market predicts that the number of non-agricultural employment will increase by 500,000 from the previous value. If the actual situation is in line with market expectations or a slight upward movement, the dollar will rise sharply, and if the non-agricultural employment data is worse than expected, the dollar will fall sharply.

Both the US ADP’s employment data yesterday and today’s initial jobless claims data were better than expected, which increased the dollar’s upward mobility. However, this has not been fully reflected on the daily chart of USD/JPY, as the market is waiting for the key non-agricultural employment data to be released in the evening. In any case, the Fed may have no choice but to reduce asset purchases (shrink the scale of bond purchases), because the current inflation environment is not as "transient" as initially thought.

Japan's official news and the US-Japan interest rate gap still need attention


Shunichi Suzuki, the Japanese Finance Minister, also issued a noteworthy statement, stating that he will pay close attention to the exchange rate of the yen in case of subsequent sharp fluctuations. He hinted that the level of 112.40 is a concern

The interest rate differential between the United States and Japan will continue to drive this market, so pay close attention to the 10-year yield in the United States and, of course, the 10-year yield in the Japanese government bond market. With the convergence of key data and risk events, the market will face volatility in the next few days, and the Fed will not make any new decisions in the short term. Investors need to be cautious and can use the currency pair as an indicator of the relative strength of the yen itself.

USD/JPY technical analysis


At present, the relative strength index (RSI) of USD/JPY has fallen from the overbought level and is expected to rise further to the highest price of 112.23 in November 2020, and then approach 112.66 next week.

On the downside, the 111.00 support level is still strong. If the fundamentals are stable as expected, the support level is unlikely to be broken. If the price does fall back to 111.00, the bulls may see this as an attractive long entry zone. It seems that it is only a matter of time before the resistance level is broken.


(Daily chart of USD/JPY)

GMT+8 At 15:18 on October 8, the USD/JPY traded at 111.97/99.