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How the US Stimulus Impacts the USD/JPY Pair |
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12th Nov 2020

How the US Stimulus Impacts the USD/JPY Pair

Article Table of Contents:

The coronavirus pandemic has been devastating for the US economy. In fact, between April and June 2020, as the country grappled with spending cutbacks and lockdowns, the US economy shrank with at a 32.9% annual rate. This was the steepest decline since the keeping of records began in 1947. Not just that, it was 3 times higher than the previous record of 10%, which was experienced in 1958. 

The United States also witnessed a staggering 20.5 million people becoming unemployed in April alone. The unemployment rate soared to 14.7%, breaking the previous post World War II record of 10.8%, experienced in 1982. The situation has improved but remains stressful. The Labor Department reported in November that more than 3.6 million people have been unemployed for over 6 months. 

The weakening of the economy has caused the US dollar to decline in value since the start of the pandemic. In fact, the trade weighted index of the US dollar was the lowest it has been since March 2018. 

The State of the US Economic Stimulus

Given the current economic environment, there is great need for a stimulus package. But the Republicans and Democrats have, so far, failed to come to an agreement on the value of the stimulus. In the stimulus talks, President Trump has suggested a value of $1.8 billion for the fiscal stimulus. This is an increase from the earlier $1.6 billion, although the Senate Republicans are reluctant to support such a large stimulus package. 

On the other hand, the Democrats are holding on to their demand for a value closer to $2.2 billion. There are other areas of disagreements as well, such as tax credits for low income Americans, aid to states, liability protection to businesses and the manner of deployment of healthcare aid. The talks have been going on for months now.  

But, in recent weeks, the chances of a stimulus package being agreed upon appear to have increased. The difference between the amounts recommended by the Republicans and Democrats isn’t as great as it initially was. Plus, now there is a new President Elect, Joe Biden. 

The Impact on the USD/JPY Pair

An economic stimulus could have a strong impact on the value of the USD/JPY, since it would have an impact on the already falling dollar value. The movement towards an agreement of a large economic stimulus is poised to weaken the dollar further. Many traders have started taking positions on riskier currencies, given the persisting weakness in the USD. 

In fact, the US dollar hit a 7-week low against multiple currencies as US President Donald Trump and House Speaker Nancy Pelosi announced that they had high hopes of coming up with a large fiscal package. Even against the Japanese yen, the greenback posted a 4-week low in October, while the yen posted its biggest single day gain since August 28, 2020. 

Additionally, Japan has the highest interest rates in the G10. On the other hand, the Federal Reserve is expected to keep the interest rates close to 0, until the US economy recovers. This also makes the Japanese yen a more attractive option for investors.  

So, the US fiscal stimulus is expected to cause a plunge in the USD/JPY pair. In fact, the decline is expected to be greater due to the election of Joe Biden as the next POTUS. These are times when a robust trading plan and appropriate risk management measures are of great importance.