(19 AUGUST 2019) DAILY MARKET BRIEF 1：Safe haven JPY muted as investors wait for trade headlines

Things are a little quiet in financial markets. Investors are momentarily turning positive on EUR following German Finance Minister Olaf Scholz statement that Angela Merkel’s government would consider suspending its debt brake mechanism by adding up to an extra EUR 50 billion of fiscal stimulus if the economy would slide into recession. Meanwhile, safe haven JPY declines as investors are waiting for major geopolitical news to turn into risk-off mode. July Trade balance data in Japan are somewhat stabilizing in negative territory for the second consecutive time while manufacturing confidence has slumped in contraction for the first time in over six years in August, as the US – China trade discords is likely to escalate amid 1 September looming tariffs.

Japan’s trade balance came negative by JPY -249.6 billion ($2.34 billion) in July, with exports down for an eight straight month by -1.60% (prior: -6.60%) and imports -1.20% (prior: -5.20%) in negative territory for the third time in a row. Additional gloomy data came on the front of monthly Reuters Tankan poll data which confirms growing worries of manufacturers, pointing at -4 (prior: 3), its third consecutive drop and given lowest since April 2013. Major sectors contributing for the decline are electric machinery (incl. automotive industry for close to 50%), metal producers, food processing and equipment transportation, suggesting that key exporting industries are likely to stay under pressure, as exports to China (-9.3% yoy, down for the fifth consecutive time) and Asia in general (-8.30% yoy), which accounts for over half of Japan’s total exports, is worsening. Yet positive headlines on the front of the US – Japan trade deal should occur as both partners are expected to sign a deal in September that should take effect this year as Japanese Economy Minister Toshimitsu Motegi and US Trade Representative Robert Lighthizer are pressed to find common grounds on tariffs of auto parts, beef, dairy products and pork. Separately, the backlash with South Korea should remain high as Japan’s tightening export controls raised willingness to retaliate.

Despite current appreciation trend, USD/JPY should turn back into negative as looming trade headlines and a cloudy global growth outlook remain on the wires. Currently trading at 106.56, USD/JPY is heading along 106.70 short-term.

By Vincent Mivelaz