Japanese Yen Surges, US Treasury Yields Sink Amid Flight to Safe Havens

The Japanese Yen rallied to multi-month highs on Friday morning as US-China trade jitters intensified and 10-year yields fell to a new 20-month low. USD/JPY fell to its lowest levels since February 1st, while EUR/JPY and CAD/JPY fell to the lowest levels since early January.

New Mexico Tariff

On Thursday evening, President Trump unexpectedly tweeted plans for a new 5 percent tariff on Mexico beginning in early June.

Mexico is the largest foreign supplier of agricultural products to the United States and is one of its top trading partners. The news roiled the markets and analysts suggest that the Mexico tariffs make the prospect of a U.S. trade deal with China even more distant.

China Ready to Restrict Rare Earths

China is reportedly ready to restrict exports of important rare earths to the U.S. if necessary. Rare earth materials are essential components widely used in high-tech consumer electronics. Roughly 35% of global reserves are in China and the United States relies heavily on Chinese rare earth imports.

Fed Open to Rate Cut

On Thursday, Vice Chairman Richard Clarida said the Fed is prepared to ease monetary policy if the economic outlook unexpectedly worsens. At an event at the Economics Club of New York, he stated:

…if the incoming data were to show a persistent shortfall in inflation below our 2 percent objective or were it to indicate that global economic and financial developments present a material downside risk to our baseline outlook, then these are developments that the Committee would take into account in assessing the appropriate stance for monetary policy.

However, Clarida affirmed that the current level of interest rates is appropriate, as unemployment remains low and inflation is around the Fed’s 2% target.

The Bottom Line

Escalating international trade tensions raise the risk of a global economic slowdown and underpin strength in safe haven assets.