Duties on Japanese automobiles push USDJPY up to March’s highs

This week, USDJPY has climbed back above the important level of 150 and is trying to determine the direction of its next move. By the end of March, the US dollar to yen ratio could be back to where it started this month, at 151.3. Thus, the whole spring drawdown will be bought back, and the short-term uptrend will have a chance of transforming into a more stable tendency. The current fundamental background also favors USDJPY’s further growth. 

On Wednesday night, Donald Trump confirmed imposition of 25% duties on almost all automobiles imported into the US. The tariffs are set to go into effect on April 2, and they may affect nearly a third of Japan’s exports to the US. Goldman Sachs analysts believe that it will lead vehicle production in the Asian country to decline by 5.8%, and GDP growth to lose at least 0.1%. Moreover, automobile production by Japanese companies in Canada and Mexico may collapse by more than 20%, further aggravating the situation. 

A new Bloomberg poll shows that market participants no longer expect the Bank of Japan to raise the key rate at its May 1 meeting. The regulator will take time to analyze the impact of US tariffs on the economy and will not tighten monetary policy till June or even July. Katsutoshi Inadome, strategist at Sumitomo Mitsui Trust Asset Management, cites 1.5% as the ceiling for the Bank of Japan’s rate in the current cycle. A sharper raise in borrowing costs is highly unlikely.

Meanwhile, expected wage increases by Japanese companies may not be as drastic as previously forecasted. Japanese Trade Union Confederation (Rengo) reports that 66% of employers intend to raise wages. However, Rengo is mostly cooperating with companies with 100 or more employees. Shinkin Central Bank Research Institute, which focuses on small businesses, provides a forecast of only 51%. Therefore, the impact of wages on inflation in Japan will be rather modest.

The RSI continues to rise far from the overbought zone, not preventing the appreciation of the dollar against the yen. The next target for USDJPY buyers is 151.3.

Consider the following trading strategy:

Buy USDJPY in the range of 150–150.5. Take profit – 151.3. Stop loss – 149.5.