After a period of continued weakness, the US dollar gained on Thursday on views that the US economy would support the greenback. Also, the US dollar has been impacted by global trade tensions and summertime trading which is lighter than expected. We see the US dollar trading in a 109.50 to 112.50 range with longer-term impact from tariffs actually narrowing the US trade deficit and rising producer prices and stronger data supporting the US dollar`s gains. Note that on Friday, the inflation data is reported.
Of course the greenback is showing continued and more pronounced strength against emerging market currencies because of the US-China trade war, which could be moving into a more serious stage, is searching for fresh drivers. President Trump seems committed to take this battle to the next level, while China has fewer tools to employ. The Russian rouble fell to November 2016 lows overnight as President Trump said the US would impose new sanctions on Moscow.
Japanese investors, traders, as well as importers and exporters will have solid two-way interest in the Yen and Yen crosses, which leads us to expect solid USDJPY buying support in the 110.00 to 109.50 range. Exporters on the other hand may be sidelined for now, only selling at the 112.00 level and higher. For a 3-month view (we do not give trade ideas), we think that USDJPY may trade to 112.50 to 113.50 in September when the next US rate hike becomes reality.
In other FX news. With the Chinese Yuan weakening around 5 percent against the US dollar this year, there could be a period of stabilization and even a reversal in 2018. Expectations are that the Chinese currency trades to 6.7 Yuan by the end of year, about two percent stronger from current levels. The rationale for this change in view, is that we feel markets are pricing in, actually overpricing in negative information. In short, market players are now too pessimistic.