USD/JPY surges on US-China tariff Truce, hits 144+ - Rabobank

News that the US and China have reached an agreement that substantially lowers trade tariffs between them for 90 days has sparked a wave of optimism that has supported risky assets and weighed on safe havens. In line with this, the JPY is the worst performing G10 currency on a 1 session view, having declined almost 1.6% vs. the greenback. We have anticipated that this quarter will bring short covering in favour of the USD. That said, we expect that JPY bulls will prevent the move extending much beyond current levels and we maintain a 12-month forecast of USD/JPY140, Rabobank's FX analyst Jane Foley notes.

JPY weakest G10 performer as risk-on wave hits safe havens

"The USD is the worst performing G10 currency in the year to date. Since Trump's tariffs announcement on April 2, the USD has appeared to perform as a risky asset. Upholding this theme, the greenback's value has bounced today on trade deal optimism. That said, we see the USD's weak performance this year as related to the build-up of long USD positions over the past few years as investors sought out US 'exceptionalism' trades. Fears that the US may face recession on the back of Trump's tariff policy caused 'exceptionalism' trades to deflate rapidly which has left the USD on the back foot."

"Last week, the UK became the first country to announce a limited trade agreement with the US. A month ago there was speculation that this accolade may have been taken by Japan. As we have argued many times on this page, Japan has a relatively strong hand going into trade talks with the US since it is the largest provider of FDI. It also has strong relationship with the US on defence issues and views itself as a collaborator in tech. That said, the timing of the July Upper House elections in Japan adds some complexity to the trade talks particularly since PM Ishiba has very low approval ratings."

"The tightening in monetary conditions implied by this year's JPY gains also counters the need for the BoJ to rush into further rate hikes.  That said, a rapid unwind of JPY gains would boost rate hike hopes, thus we would expect JPY buyers to limit upside potential in USD/JPY near-term.  In our view, scope for short covering in favour of the USD is set to support the greenback this quarter.  However, on the assumption that the US and Japan find a compromise on trade, we would expect the downtrend in USD/JPY to re-emerge in H2.  We maintain a 12-month forecast of 140.00"