(09 MAY 2019)DAILY MARKET BRIEF 2:JPY in demand as fears of trade war escalation rises

Threat of a trade war escalation is increasing, and manufacturers would most certainly pay the price. This is the case of Japan, which suffered the consequences of a sharp slowdown in exports to China from January to March 2019, putting quarter-on-quarter GDP 2019 most likely flat in 1Q 2019 (prior: 0.50%) when published on 20 May 2019. Yet considering the succession of natural disasters from July to September last year, the Japanese economy has remained solid with manufacturing activities maintained in expansion territory and strong consumer spending maintaining growth positive. However, the impact of an increase in tariffs on $200 billion in Chinese imports Friday would not bode well for Japanese suppliers of components and materials, which would face lower demand from Chinese producers of American finished products, ultimately affecting exports and putting downward pressure on the economy. In addition, a sustained rise in JPY would not help to improve competitiveness.

JPY is in great demand as suggested by USD/JPY 1 month at-the-money implied volatility, given highest since mid-January 2019. USD/JPY (-0.36% intraday) is turning neutral year-to-date and approaching support at 109.71 (25/03/2019 low). Currently trading at 109.75, the pair is expected to rebound, approaching 110.10 short-term.