(20 November 2019)DAILY MARKET BRIEF 1:JPY rising amid trade headlines, Fed minutes

The geopolitical standoff between US and China has made the business of traders anticipating demand for safe haven JPY in a risk-off environment as positive headlines on the front of the automotive industry after the expiration of the deadline due by the Trump administration to trigger Section 232 of the Trade Expansion Act provided the single currency with a temporary boost. There is yet growing arguments that tend to support the case of a technical recession in 4Q 2019 in Japan following the release of flat 3Q GDP data and poor export numbers in October. In the current situation, we would consider that the slightest sign of weakness in domestic consumption should finally push Japanese authorities to launch the long-awaited fiscal stimulus package amid headwinds caused by the sales tax hike from 8% to 10% in October and the trade discord. As uncertainties over the outcome of the US – China phase one deal mount, JPY should stay coveted, a bad news for the export-reliant economy, which continues to suffer from lower external demand.

Updates on the front of the US – Japan bilateral trade deal after the lower house of the Japanese Parliament confirms having ratified the draft consisting of lower tariffs for US agricultural products including beef, pork, wheat and wine as well as for Japan’s industrial tools and machines, effective in January 2020, is a big win for the US side. As the Upper House is expected to approve the vote, it seems that Japan is not immune from a potential backlash if the US authorities finally decide to introduce tariffs on Japanese cars and car parts, as the idea of the "sunset clause" seems to have been lost on the way. While trade tensions are rising following Trump's comment that additional tariffs await China if negotiations fail (probably on 15 December 2019), without mentioning the US Senate's Hong Kong Democracy Bill to protect human rights in the city, it seems that a bearish bias is to be favored at this time. In Japan, both annualized 3Q GDP and exports in October, marking at 0.20% (prior: 1.80%; consensus: 0.90%) and -9.20% (prior: -5.20%), the biggest drop in three years, definitely increase the odds of fiscal stimulus measures while monetary easing seems more likely by the end of 1Q 2020. Investors will be closely monitoring the Fed’s FOMC minutes as expectations are for another rate cut in 2020.

By Vincent Mivelaz