TWD: USD/TWD Rally Continues, +2% Higher This Week, Overbought On RSI

This morning has seen US futures open slightly higher as President Trump announced a trade deal with Japan. The response is pretty muted considering how important this deal was seen, ESU5 +0.10%, NQU5 -0.05%. If risk continues to trade well then this dip in the JPY crosses should potentially find some demand from which to try higher again.

• EUR/JPY - Overnight range 171.37 - 172.93, Asia is trading around 172.10. This pair has had a decent move higher and has led the charge against the JPY longs. Short-term it is starting to look a little stretched but the direction is clear and should expect demand on dips. First support 170.00 area then the more important 168.00 area.
• GBP/JPY - Overnight 197.44 - 199.29, Asia trades around 198.25. The pair had a look below its support around 198.00 overnight but could not follow through. Can this trade deal give it the support it needs to regain momentum higher ? 
• NZD/JPY - Overnight range 87.45 - 88.03, Asia is currently dealing 88.00. The pair has seen upward momentum stall. The Support towards 87.00 needs to hold for the focus to remain on the 90.00/91.00 area.
• CNH/JPY - Overnight range 20.4034 - 20.6208 Asia is currently trading around 20.4500. This pair has pulled back from its highs but the pair still looks like it could continue to press higher. Price is now probing the support area between 20.3000/20.4000 where demand should start reemerging.

Fig 1 : CNH/JPY 120min Chart

Source: MNI - Market News/Bloomberg Finance L.P

A trade deal has been reached between the US and Japan ahead of the August 1 deadline, which has been seen as positive by markets with the Nikkei up 2.4% but USDJPY has given up its earlier gains and is little changed at 146.64. Imports from Japan, including autos, will face a 15% tariff down from the 24% announced in April but higher than the current average below 5%. This lower rate is in exchange for $550bn of Japanese investment in the US.

• Japan is a key US ally and so a deal was expected but the US’ 2024 merchandise deficit of $69.4bn with Japan, larger than the deficit with Canada, made it a target of President Trump’s protectionism. 4.5% of 2024 US imports came from Japan, the fifth highest.
• Japan has one of the higher export shares to the US at 19.9% of total goods shipped in 2024 but at only 3.5% of GDP, it has a relatively lower impact on the economy. 

Exports to the US (ex NAFTA) 2024 %

• However, certain sectors are highly exposed, especially autos. Japan is the second largest source of US personal vehicle & light truck imports at 16% of the total only behind Mexico’s 32%, and 8% of parts. Japanese autos will now face the agreed 15% duty below the universal 25% against all vehicle imports and as a result Toyota and Mazda shares have rallied. 

US imports personal vehicles & light trucks % total 2024

• Japan frontloaded shipments to the US through Q1 and Bloomberg container ship tracking data signal that continued in June ahead of the earlier July 9 deadline, but vessels departing for the US are down in July. However, the value of exports to the US fell 11.4% y/y in June after rising 10.5% y/y in February.

The BBDXY range overnight was 1194.92 - 1202.13, Asia is currently trading around 1196. The USD again fell very easily overnight, aided by the move lower in US yields. The market is much more comfortable selling USD’s, while below 1220 rallies should continue to find supply. What stands out overnight though is the USD could not move higher while the risk of Powell being removed hung over its head, last night both Trump and Bessent pulled back from that scenario and intimated Powell would complete his term. US yields have moved lower as a result taking the USD with it, but that means the USD now goes down in all scenarios ?

• China Daily -  “Reports that it is a 'strategic necessity' for the scaling back of holdings in US Treasuries, given the declining confidence in the dollar as the reserve global currency.”
• President Trump on Truth Social: "We just completed a massive Deal with Japan, perhaps the largest Deal ever made. Japan will invest, at my direction, $550 Billion Dollars into the United States, which will receive 90% of the Profits. This Deal will create Hundreds of Thousands of Jobs — There has never been anything like it. Perhaps most importantly, Japan will open their Country to Trade including Cars and Trucks, Rice and certain other Agricultural Products, and other things. Japan will pay Reciprocal Tariffs to the United States of 15%.”
• (Bloomberg) - “American Exceptionalism Leaves US Stock Premium at More Risk. The global premium afforded to US stocks and bonds is on less stable ground as it can no longer rely on the dollar’s reserve status. The US’s current account deficit is now almost exclusively funded by private, non-central bank inflows.”
• There is a broad consensus that the USD is set to embark on a decent move lower as the world reduces its exposure to the US and repatriates a lot of these flows. This consensus will also result in some decent short squeezes as a lot of the market is positioned the same way.

Fig 1: BBDXY Daily Chart

Source: MNI - Market News/Bloomberg Finance L.P