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Pressure on USD/JPY continues ahead of Trump-Abe meeting

  • US President Donald Trump is scheduled to meet with Japanese Prime Minister Shinzo Abe on Friday this week for their first official meeting since Trump’s inauguration.
  • Since taking office, Trump has signed an executive order withdrawing from the proposed Trans-Pacific Partnership (TPP) trade deal, of which Japan was a key participant.
  • Trump has recently and repeatedly accused both China and Japan of devaluing their respective currencies to gain advantages in trade.
  • Trump has also attempted to talk down the dollar, stating that it is “too strong” against the currencies of its trading partners, particularly those in Asia.
  • Discussions this week between Trump and Abe are likely to focus largely on trade and investment issues, including Japan’s trade surplus with the US, Japanese investment in US infrastructure projects, and the relative currency valuations between the dollar and yen.
  • USD/JPY rose sharply in the last quarter of 2016, especially after Trump won the early-November presidential election, which resulted in a dramatic surge for the dollar.
  • Since the beginning of 2017, USD/JPY has been pulling back as the dollar has retreated on heightened uncertainty over Trump’s fiscal and trade policies as well as the Federal Reserve’s perpetually ambiguous outlook on monetary policy.
  • This pullback has brought USD/JPY down from its 118.00-area height in the beginning of the year down to the 112.00-area as of this writing. The current level is also right around the 38% Fibonacci retracement of the sharp uptrend from late-September to mid-December of 2016.
  • If previous Trump comments are any indication, the Trump-Abe discussions are likely to feature Trump highlighting the “unfair” weakness of the yen and strength of the dollar. Although this is unlikely to result in any material policy change on the part of Abe, the currency-related pressure from Trump could set the tone for US-Japan trade negotiations going forward.
  • Any such pressure exerted by Trump this week could have a marked effect on USD/JPY, potentially weighing further on the dollar while boosting the yen. In this event, the year-to-date slide for USD/JPY could extend further to the downside, with key short-term targets at the 111.00 and 108.00 support levels.

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