- USD/JPY price is set to continue moving in response to US-Sino trade relations in 2020.
- The US Presidential elections will grow in importance as the year progresses.
- Central banks will likely attempt to step back, but may come under pressure to act.
- Iran and North Korea may impact the safe-haven yen as well.
“Bye bye bye” – N-Sync’s greatest hit from the 1990s can be used to say farewell’s the 21st century’s second decade. The global economy is in-sync once again – but political uncertainty remains elevated and will likely be enhanced in 2020.
2019 was dominated by trade talks as the primary driver for the safe-haven Japanese yen while the Federal Reserve’s shift from raising rates to cutting them weighed on the US dollar. Nevertheless, brighter prospects for the US economy – despite external headwinds – kept the currency pair in check. It is ending the year at the 109 handle it kicked off the year, completed a 700-pip journey.
In 2020, central banks on both sides of the Pacific will likely try to stay in the shadows, with their success in doing so depending on the government. The fate of global commerce will likely remain high on the agenda, but gradually make way for another political drama – the US Presidential elections.
Fed reverses course
Jerome Powell, Chairman of the Federal Reserve, will remember 2019 as the year he reversed policy – cutting interest rates for the first time since 2008. At the beginning of the year, the Fed’s projection of future interest rates was still showing higher borrowing costs. Yet already in January, Powell signaled his reluctance to take the path of hiking rates. He then moved to sit on the fence in March, and by June, the Chairman already opened the door to cutting rates.
What caused the dovish shift? The Fed’s higher rates seemed to choke the domestic housing market early and inflation was nowhere to be seen. And while wage growth accelerated and surpassed the 3% mark in annual terms, there seemed to be no imminent need to stay ahead of raging price rises.
The historic cut came in July and while Powell’s message was mixed, he followed through by overseeing two more reductions later on. The “mid-cycle adjustment” ended with three cuts. For dollar/yen, lower rates somewhat weighed on the dollar, but also allowed the global economy – dependent on the greenback – to lift its head The Fed’s willingness to act by cutting rates and also ending its Quantitative Tightening program helped support global markets and diminished demand for the safe-haven yen. US real-estate also recovered. While the business cycle is now more in-sync all over the world, America leads to global growth.
The Washington-based institution’s moves were accompanied by dissent and criticism, but by year-end, the decision to sit on the fence and wait for more data was already accepted in harmony. Even President Donald Trump – who vehemently criticized the bank throughout the year – seemed to moderate his tone.
Deal or no deal?
Trump’s trade war with China has also reached a calm of sorts, but developments during the year were far more erratic and caused jitters. USD/JPY was often whipsawed on trade headlines.
While negotiators from the world’s largest economies failed to meet the early March deadline, reports were optimistic until early May, when China had second thoughts about certain aspects of the deal. Washington slapped Beijing with new tariffs and relations remained sour for around two months. During June, Powell cited uncertainty coming from commerce as one of the main drivers of opening the door to rate cuts. Trump met his Chinese counterpart Xi Jinping in late June and both leaders agreed on a trade truce.
New negotiations held only until mid-August when talks broke down and Trump announced substantially higher levies from September – only to regret some of them and push them back to December. As autumn leaves were falling, the economic giants agreed to settle for an accord in two phases, with Phase One serving as a platform for reducing tensions.
Despite upbeat comments, a deal was reached only at the last moment, and at the time of writing, its details are uncertain. Overall, it seems easier to agree on Chinese buying of US agrifoods and the removal of tariffs, but harder to come to terms with structural changes in China. Moreover, Beijing is angered by Washington’s criticism of its actions in Hong Kong and Xinjiang. And the most significant development is that both countries have begun to gradually move away from dependence on each other – the Great Decoupling – a topic that may rise to higher prominence in 2020.