JPY: The recent announcement of a higher-than-expected US reciprocal tariff on both China and Japan triggered JPY strength today. Despite the recent softening of US equity prices, President Trump’s decision to implement these higher-than-anticipated tariffs suggests the so-called “Trump Put” is unlikely to provide any immediate support.
Given the expected inflationary pressures from these tariffs, the hurdle for the Fed to cut the policy rate aggressively is perceived to be high as well. For the time being, concerns over a potential US recession are likely to persist, exacerbating the negative risk sentiment and exerting upward pressure on JPY in the FX market.
For Japan, the anticipated reciprocal tariff rate of 24% as well as auto tariffs represent major economic downside risks. Although domestic indicators, including the BOJ's Tankan, suggest the BOJ remains “on track” towards continued rate hikes, given the current stock market downturn and JPY appreciation, the likelihood of an additional hike at the next board meeting in May has diminished considerably. The Tankan showed the assumed USD/JPY rate among Japanese firms was 147.06 for FY25, which aligns closely with the current exchange rate. Amidst growing concerns over the negative impact of tariffs on the manufacturing sector, domestic authorities may increase their vigilance against JPY appreciation, leading to potential verbal interventions. Given the current global political landscape, the scope for intervention against JPY appreciation is extremely limited, and the effectiveness of any verbal intervention is expected to be short-lived. Overall, we see a risk of USD/JPY moving lower, potentially below our current forecast of 145 by end-June, consistent with our long JPY view.
In Korea, we raise our conviction levels on long JPY/KRW to 4/5, targeting 10.0 (~6% total gains) by end-May, with a risk of overshooting towards 10.4. Reasons for KRW underperformance against JPY include: 1) Korea faces a relatively high reciprocal tariff rate of 25%, as well as an auto (and parts effective from 3 May) tariff rate of 25% , which represent serious threats to Korea’s export-oriented economy; 2) Korea is also vulnerable to collateral damage from US tariffs on China and Trump’s proposed tariffs on semiconductors. The Trump administration is looking to launch a Section 232 investigation into the semiconductor sector (Bloomberg , 3 April), which would be a significant negative factor for Korea tech exports ; 3) local political concerns remain ahead of the Constitutional Court ruling on President Yoon’s impeachment on 4 April. While not our base case, our economics team is concerned that a no impeachment scenario could result in elevated political uncertainty, fiscal restraint and increased pressure on the BOK for more rate cuts; and 4) the BOK’s relatively weak FX reserve adequacy limits its ability to sell USD sustainably . Latest March 2025 data suggests that BOK drew down USD5.1bn of its spot FX reserves, as USD/KRW was bid through the month.
In Thailand, we raise the conviction level on our short THB/JPY position to 4/5 (from 3), targeting 5% gains to 4.20 by end-May. We see many local factors for THB underperformance against the JPY, including flow factors, such as: 1) low season for Thai tourism in Q2 will likely be exacerbated by the recent earthquake. Following the 28 March earthquake, Thai Tourism Minister said the number of trip cancellations have been noticeable (Bloomberg , 31 March). Historical experience of natural disasters also showed a substantial subsequent decline in foreign tourist arrivals; 2) Thailand is also entering the high season for foreigner dividend repatriation, which peaks in May; 3) Thailand is also exposed to Trump’s high reciprocal tariff of 36% , as well as tariffs on autos and chips . Therefore, the recent strength in Thailand’s exports and the trade surplus may not be sustained. Furthermore, Thai precious metals exports are not only likely to fall ahead, but there is a risk that Thai gold traders will need to re-accumulate inventory ahead, further dragging on the BoP. The other risk around gold is the possible breakdown of USD/THB/gold relationship that could lead to some CTA THB positioning unwind; 4) local demand for USD will remain a drag on THB. The wider US-Thailand rates differential may continue to drive an onshore corporates shift into foreign currency deposits (FCDs); 5) BOT may cut faster and deeper, given its likely concerns over weakening growth, especially following the earthquake. Our economics team forecasts an additional 100bp of BOT policy rates cuts to 1.00%; and 6) other factors for THB underperformance remain intact, including lingering concerns over BOT credibility and the BOT’s preference to accumulate FX reserves.
