Last month, I made the argument that in spite of having seen recent growth, the JPY/USD could stop seeing upside as the market appears to be shifting away from risk-off currencies at this time.
However, with the Federal Reserve in the United States having cut interest rates for the first time in a decade, the yen has seen a big spike this month:
Moreover, we can also see that in spite of this, the JPY/USD still remains below peaks seen in 2014 and 2016:
With yields on U.S. treasuries having fallen as a result of the rate cut, the depreciation in the USD was not unanticipated. With that being said, a significant contributing factor to both rate cuts and the depreciation of the USD has been a new round of tariffs imposed by the Trump administration on China - specifically 10% on $300 billion in Chinese imports that are not currently subject to any tariffs.
Notably, stocks have also declined in response to the decision, with the S&P 500 down by 3% this month:
Should stock prices finally be buckling under the pressure of the US-China trade war, then this could increase speculation that further rate cuts are on the way - and this would further dampen demand for the U.S. dollar and in turn increase demand for risk-off currencies such as the yen.
As regards the Japanese yen itself, the risk-off nature of the currency means it is likely to continue rising, even if the domestic situation in Japan is not too encouraging. With this being said, the Bank of Japan is ready to pull the trigger on further quantitative easing if inflation targets remain out of reach.
With this being said, both the Federal Reserve and the ECB have adopted quantitative easing, and thus a similar policy by the Bank of Japan is unlikely to depreciate the currency by a significant margin. Depending on the extent to which a US-China trade war leads to a further downturn in the stock market, then the yen could stand to rise further. In the next six months, I anticipate that the currency could appreciate further to the 2018 high of just below 0.096, and there could be scope for further upside to the 0.01 level if this resistance is breached.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.