Yen Volatility Could Take Center Stage

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These days, the issue facing most markets on the international stage is the ongoing saga of trade. On the campaign trail in 2016, U.S. President Donald Trump railed against the “bad deals” made by previous administrations when it came to trading partners around the world. He told audiences that, if elected, his administration would rework the cumbersome and “unfair” multilateral trade agreements that caused massive trade imbalances for the United States. To “Make America Great Again,” which was the slogan that likely won him the Presidency, candidate Trump pledged to renegotiate existing agreements to bring “reciprocity and fairness” back to international trade. In 2018, one year into his administration, President Trump took on the trade issue with no less enthusiasm than he addressed the issue when running for office.

The administration put tariffs in place on steel and aluminum to support U.S. businesses that had been the victim of dumping by foreign producers of the metals. Moreover, he slapped tariffs on $50 billion in Chinese goods coming into the United States to punish the nation that he believes benefits most from inequities in trade agreements. The first tariffs on Chinese goods took effect on July 6.

Trade partners around the world have responded to the aggressive moves of the Trump administration with retaliatory measures aimed at U.S. goods coming into their countries. One of the leading sectors hit by the tit-for-tat trade disputes has been the agricultural products that the U.S. ships all over the globe. The United States has a long history as an agrarian nation and is the world’s leading producer and exporter of soybeans and corn. The U.S. is also a significant exporter of wheat. The tariffs issue has weighed on the prices of agricultural commodities. In June, soybean futures fell to their lowest price in a decade with corn and wheat prices also posting losses.  The grain prices fell during a time of the year when there is still uncertainty about the 2018 crop as the weather across the fertile plains of the U.S. is the chief determinate of this year’s crop that will feed the world. Tariffs distort commodities prices as they interfere with the usual supply and demand fundamentals by erecting financial roadblocks on borders to impede the flow of raw materials.

The current protectionist wave has two possible outcomes. Either new trade agreements will solve the issue, or the tariffs and retaliation will continue to spiral into a trade war. When China said they plan to retaliate with tariffs on U.S. goods, President Trump threatened another $200 billion in protectionist measures on Chinese products. The trade issue that could become a war has caused uncertainty to increase as the protectionism could lead to a global recession. Markets are currently under the threat of a risk-off period where participants move to the sidelines and seek shelter in safe assets that typically protect wealth during times of stress and heightened volatility. The Japanese yen currency has a history as one of those harbors of safety, and it has been making higher lows and higher highs since late 2016. 

Source: CQG

As the weekly chart of the Japanese yen versus U.S. dollar relationship highlights, the yen has been moving higher in a bullish price trend for the past eighteen months. While the yen has weakened since March, the pattern of higher lows remains intact. Given its history as a flight to quality asset, we could see more buying in the yen as the trade issue continues to impact markets across all asset classes. The yen has been consolidating at a higher level since May, and it may not be long before volatility returns to the currency over coming weeks. The yen can be a volatile currency which offers market participants lots of opportunities when it comes to trading. We could see yen volatility take center stage as the trade issues continue to be in the spotlight.


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