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The Japanese yen has lost a lot of its shine in April, slipping around 0.7 percent against the USD in the month as risk sentiments improved amid signs of green shoots and resurgence in USD strength. These have provided the impetus for the USD/JPY currency pair to hover above the 111 levels for most of April, according to the latest research report from May Bank.
The USD/JPY may find relief and face downward pressures in May. The month of May is seasonally a strong month for the JPY. In 6 out of 10 years, the currency pair has slipped lower in the month of May.
However, gains in the JPY could be partially mitigated by an improvement in global risk appetite should a Sino US trade deal be reached. Further talks have been scheduled in early May with an eye to a deal to be signed by Trump and Xi at a summit planned for the end of May.
Expectations for some kind of compromise deal between China and the US will be market positive and drive sentiments higher, which in turn will see a shift away from safe-haven assets to riskier assets. This should support the USDJPY higher. A breakdown in trade negotiations is likely to spur safe-haven proxy FX demand and lift the JPY higher, the report added.
The Fed’s move to keep its interest rates at current levels for a prolonged period should see USD strength fade and UST yields slip lower. The dot plots shared by the Fed showed that a rate hike is no longer in the cards in 2019 compared to two hikes previously.
"For 2020, the Fed is looking for just one rate hike. This move to signal that the Fed is near the end of its current tightening cycle suggests that the bias is no longer for a tightening ahead. We could thus see the unwinding of stale long USD positions against its G10 peers, pressuring the USD lower. USD weakness should lift the JPY higher," May Bank added in its comments.
