USD/JPY – Strong Dollar Pushes Yen Close to 114

The Japanese yen has ticked lower in the Wednesday session. In North American trade, USD/JPY is trading at 113.91, up 0.11% on the day. On the release front, U.S. Preliminary GDP for the third quarter gained 3.5%, just shy of the estimate of 3.6%. This follows an identical gain of 3.5% in the Advanced GDP release. Japan will release retail sales, with an estimate of 2.7%. Thursday promises to be a busy day, as the U.S. releases three key indicators – Core PCE Price Index, personal spending and unemployment claims. As well, the FOMC releases the minutes of its November policy meeting. Japan will publish Preliminary Industrial Production.

The Bank of Japan is committed to its target of just below 2 percent, but that goal remains elusive. BoJ Core CPI, the preferred inflation indicator of the bank, edged up to 1.3%, its highest level in 2018 (the indicator posted an identical gain in August). Inflation could face further headwinds, as the slowdown in China and the ongoing global trade war takes a bite out of the country’s export sector. As well, the recent drop in oil prices is also likely to hamper inflation. There is little reason to expect that inflation will gather any upward momentum and some analysts are forecasting that inflation in 2018 will fall below the 1 percent level. Weak inflation means that the BoJ has little incentive to alter its ultra-accommodative monetary policy.

All eyes are on the G-20 summit in Argentina, which begins on Friday. Analysts aren’t particularly interested in the agenda of the summit, which is likely to be overshadowed by a meeting on the sidelines between President Trump and Chinese President Xi Jimping. The stakes are high, as the tariff spat between the two economic giants threatens to dampen global growth. Will we see a thaw in the tariff spat, or will Trump and Xi take shots at each other’s policies? Trump has threatened to raise tariffs on Chinese products from 10 percent to 25 percent, but this could be grandstanding ahead of the summit. Trump has always preached ‘the art of the deal’, and the markets are hoping that cooler heads will prevail and the U.S. and China can reach some kind of agreement.