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Escalating US and Chinese trade conflicts, hints that the Fed will lower the federal funds rate and sluggish inflation pushed the yield on Treasury 10-year bonds to their lowest level since 2016. Investors are seriously worried about the slowdown of the US and global economy and are increasing their share of safe-haven assets in investment portfolios. As a result, not only bonds, but the yen and gold are also very popular.
If someone is not satisfied with the appreciation of the currency of the rising sun, then this is the Bank of Japan. Despite a large-scale stimulus package, inflation cannot rise above 1%, and a fall in business activity in the manufacturing sector, a reduction in exports, supply chain breakdowns and a decline in business investment as a result of trade wars risk plunging the economy into recession. The situation is exacerbated by a sales tax increase, which in 2014 led to a technical decline. As a result, public support for Shinzo Abe's government is falling, and officials needs to seriously consider what kind of incentive measures can help the GDP.
Dynamics of Japanese inflation
It is unlikely that something serious should be expected from the central bank. Despite Harukiho Kuroda's threats to lower rates and expand QE, investors realize that the BoJ's ammunition arsenal is limited. Instead of the claimed £80 trillion per year over the past 12 months, he gained only £29 trillion. It is no longer necessary to maintain the yield of 10-year bonds in the range of -0.2%/+ 0.2%. Deepening the overnight rate to negative territory will cause additional damage to the country's banking system. Perhaps Kuroda is right, and the government should increase the fiscal stimulus and issue more bonds. With the current yield, the cost of servicing the debt actually falls on the shoulders of their buyers.
The yen is a typical example of the QE's inefficiency. Not only does inflation in Japan persistently not want to go to the target, so also a large-scale monetary stimulus does not lead to devaluation. The Bank of Japan has expanded its balance sheet much more than its counterparts from the Fed and the ECB, but the goals have not been achieved.
Dynamics of central bank balances
The situation may even turn into a breeze if Donald Trump and Xi Jinping do not find a common language at the Osaka G20 summit. In this scenario, which will be interpreted by investors as a further escalation of the trade conflict, the yields of bonds around the world will continue to fall, and the Fed will be forced to lower the federal funds rate in July. The expectations of the monetary expansion of the Fed are a "bearish" factor for USD/JPY. And no matter how much the Bank of Japan would like to adequately respond to its colleagues from Washington, its possibilities are limited. On the contrary, if after the negotiations of the two presidents the deal becomes closer, the global risk appetite will increase, and the demand for safe-haven assets will fall.
Technically, the 5-0 pattern was clearly implemented on the daily USD/JPY chart. Reversal to the wave of the "Shark" CD pattern made it possible to form short positions. If the "bears" succeed in rewriting the June low, the chances for the realization of the target by 261.8% according to the AB = CD pattern will increase.
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