The Japanese markets opened on Tuesday after a ten-day break as the country celebrated the “Golden Week’. This is a week in which the country welcomes a new emperor. As the markets opened, traders found that the Japanese yen was hovering above the $110.70 level, which is where it was before the markets shut. To many traders, this was a good thing because there were expectations that a flash crash would happen at a period of low volumes.
Part of the reason why the Japanese yen has strengthened against the USD is that Donald Trump has showed that he will continue with his trade war. On Sunday, out of the blue, the president tweeted that the country will implement additional tariffs on Chinese goods on Friday this week. When there are so many market risks, the yen is often viewed by traders as a safe haven. It is viewed as a haven because of the vast international holdings that Japan holds. For example, it is the second largest holder of US debt after China.
The second reason why the yen has gained is because of the Bank of Japan. In its most-recent meeting, the bank gave a guidance on when it will hike rates. This guidance was for a rate hike in 2021. While this is still far, it provided clarity to investors on the monetary policy. In the minutes of the meeting released yesterday, some officials sounded a warning about the prolonged period of ultra-low interest rates. They argued that these rates will certainly affect the country’s small banks.
While the yen could continue moving higher, there are two things traders should focus on. First, the country will release the household spending data tomorrow. This number is expected to show an increase by 1.6%, which might be lower than February’s 1.7%. On a MoM basis, the spending may rise by 0.5%. The average cash earnings are expected to decline by minus 0.8%.
Second, investors should be careful about the yen because domestic investors may receive more than $399 billion proceeds from the redemption of the Japanese government bonds. The risk is that most of this money will not be deployed in Japan, a country with negative interest rates.
Meanwhile, the USD/JPY pair has dropped from a high of 112.40 to a low of 109.85. On the chart below, this price is below the 25-day and 50-day moving averages while the RSI has remained at the 40 level. The Stochastic indicator has also remained near the oversold level. While the pair could continue moving downwards, it may retest the previous resistance level of 110.