This article analyzes the recent strengthening of the Japanese yen, driven by narrowing interest rate differentials with other countries. It explores the impact of potential US tariffs on Canada and Mexico, and the implications for the USD/JPY pair. The article also discusses the upcoming Bank of Japan (BoJ) rate decision and its potential impact on the yen's trajectory.
The narrowing interest rate differentials between Japan and the rest of the world have been a key theme in the improving Japanese yen forecast in the last couple of weeks. The mainpair dropped to fresh five-week lows on Tuesday, before bouncing back to trade in the green at the time of writing, while yen pairs such as the, which have been falling even more sharply because of Trump’s plans to impose tariffs on Canada’s exports to the US, remained in the red.
Rates markets are currently pricing in two full 25bp hikes by the end of 2025, with the first one arriving this week. Thus, if the BoJ opts for a smaller hike or no hike at all, that could trigger a significant downside for the yen.Yesterday, there was initial optimism surrounding trade policy before Trump’s inauguration speech. But later this was overshadowed by news that the Trump Administration is likely to implement 25% tariffs on imports from Canada and Mexico starting in February.
Trump intends to overhaul the trading system in order to “tariff and tax foreign countries to enrich our citizens” through the creation of an"external revenue service." His goals to reform international trade policies clearly prioritize American industries and aim to reduce trade deficits. By imposing tariffs on imports, revenue would be redirected toward domestic economic growth and infrastructure development.pair in recent months, and the Loonie hit a new high of just above 1.
USD/JPY’s dip overnight was brought around the minor horizontal support at 155.00. However, if rates resume lower and we go below this level, then you have a short-term uptrend that was established from September, around 144.00, to keep an eye on, followed by the 200-day moving average around 152.80 area.
JAPANESE YEN USD/JPY INTEREST RATES TARIFFS BANK OF JAPAN
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