The fall in the US yield curve to its lowest point since 2007, as well as the increased likelihood of a weakening of the Fed's monetary policy in 2019 to 95%, have become catalysts for the demand for safe-haven assets. The rates on 10-year US Treasury bonds were confidently moving down, and investors are almost sure that they will return to the zone of 1.5-2%, where they stayed in 2016. The Japanese yen at the final auction of spring marked a 1.2% rally against the dollar, which is the best daily dynamics over the past couple of years. Unless, of course, do not take into account the January flash accident.
The initiator of the next surge of interest in safe-haven assets was Donald Trump, who announced the introduction of tariffs of 5% for all Mexican imports if Mexico City does not stop the flow of illegal migrants to the States. Fees can rise to 25%, which is fraught with disruption of supply chains, deterioration of business activity and recession. The inversion of the yield curve says the same thing and the derivatives market is already laying the expectations for two or three cuts in the federal funds rate in 2019.
The dynamics of the estimated value of the Fed rate
The yen is responsive to both the fall in the yield of 10-year Treasury bonds to its lowest level since 2017 and the growth in the likelihood of the Fed's monetary expansion. For the first time since 1990, the Bank of Japan did not follow the steps of the Federal Reserve and did not tighten monetary policy, which is a bullish factor for the USD/JPY pair. Nevertheless, it has already been won back and the falling chances of maintaining the federal funds rate at the level of 2.5% to 5% inspire the bears in the analyzed pair to attack.
According to research by Morgan Stanley, the US economy will not sustain and plunge into recession if the States impose duties on all Chinese imports, after 9 months. Oxford Economics believes that the same (recession) will turn the duty on the supply of goods from Mexico to US markets. Ultimately, if the White House gives out tariffs to the left and to the right, then why not fortify reliable assets? If business activity in various sectors of the US economy in May falls below the critical level of 50, the USD/JPY pair runs the risk of continuing the downward hike towards 105.
Along with the release of purchasing managers' indices in the week to June 7, investors should pay attention to the release of statistics on the US labor market and the ECB meeting. The theoretically generous LTRO (the Governing Board promised to announce the details of the banks' long-term refinancing program in June) and impressive growth in employment outside the agricultural sector in the United States is able to return interest to risky assets. The S&P 500 that sank by 6.6% in May (the worst stock index dynamics since December) can lick some of the wounds, which will have a negative effect on the USD/JPY bears. However, there is another option, which is non-farm payrolls to much worse than expected and the USD/JPY pair continues to swoop down into the abyss.
Technically, the quotes of the pair at arm's length approached the convergence zone identified by means of targets by 88.6% and 161.8% in the patterns "Shark" and AB = CD. Rebounding from important support will enhance the risks of a correction in the direction of 23.6%, 38.2% and 50% of the "Shark" wave CD.
USD / JPY daily graph
