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Overall risk appetite dragged the yen to the bottom last week. Will the bulls regain their momentum over the next couple of days?

Trade balance (Sept. 18, 11:50 pm GMT)

The world’s third largest economy surprisingly recorded a trade deficit in July. And interestingly, Japan’s politically-sensitive surplus with the U.S. shrank by 5.2% from a year earlier while exports to China shot up by 11.9%.

This week market players see Japan widening its trade deficit from 232B JPY to 469B JPY in August.

Exports are expected to grow faster from 3.9% to 5.6%, but imports are also expected to edge higher from 14.6% to 14.9%.

Remember that Trump juuust might be targeting Japan next in the trade war. If Japan’s surplus with the U.S. edges higher, or if Japan’s trade deficit prints wider than many are expecting, then officials might have less advantage over the U.S. in the upcoming (?) trade war.

BOJ’s policy statement (Sept. 19, Asian session)

In its July statement the Bank of Japan (BOJ) surprised markets with its decision to “maintain the current extremely low levels of short- and long-term interest rates for an extended period of time.

Not only that, but Governor Kuroda and his team have decided that the JGB 10-year yields “may move upward and downward to some extent.

This week market players aren’t expecting any changes from the central bank. The BOJ has a scheduled presser during the trading session, however, which could see Kuroda repeating his statement that they don’t plan to raise their rates “for quite a long time” even as their peers tighten their policies.

Overall risk sentiment

The yen might have decoupled from bond yields last week, but that doesn’t mean traders are done treating the low-yielding currency as a safe haven!

This week China is set to ask the World Trade Organization (WTO) to impose sanctions on the U.S. for not fulfilling its anti-dumping penalties.

And then there’s the teeny tiny issue of the U.S. issuing another $200 billion worth of tariffs on Chinese goods despite Washington extending invites to China for another round of trade-related talks last week.

The Donald seems to be set in imposing the next set of tariffs, however, so you might want to buckle up and not miss any headlines over the next couple of days.

Last Week’s Price Review

The yen is THE worst-performing currency of the week as of 8 am GMT.

Overlay of Inverted JPY Pairs & US10Y Bond Yield (Black Line): 1-Hour Forex Chart
Overlay of Inverted JPY Pairs & US10Y Bond Yield (Black Line): 1-Hour Forex Chart

JPY pairs were tracking bond yields (as usual). However, risk sentiment also helped to dictate the yen’s price action. And there were three clear instances when JPY pairs decoupled from bond yields.

The first instance happened on Tuesday and was actually beneficial for the yen. Bond yields were on the rise at the time, but risk aversion was the name of the game, thanks to the WTO’s September 21 meeting agenda showing that the WTO’s dispute settlement body will be hearing China’s request for permission to impose sanctions on the U.S. for anti-dumping violations.

As for the other two instances, they were detrimental to the yen and helped in the yen’s downfall.

The second time the yen decoupled from bond yields is on Wednesday since bond yields were drifting lower back then, but the yen was attacked by sellers (except on USD/JPY) after word got around that the U.S. invited China to another round of trade talks.

And the last time the yen clearly diverged from bond yields is when bond yields fell on Thursday because of ECB Overlord Draghi’s presser and the disappointing U.S. CPI report, but the yen continued to weaken across the board, likely because risk appetite refused to go away.

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