USD/JPY Consolidating in the Calm Before the US-China Talk and FOMC Storm
Matt Weller, CFA, CMT January 28, 2019 10:37 AM
For once, the weekend brought little in the way market-moving economic developments, and with Australian traders out on holiday, the FX market has seen a quiet start to the week.
However, this proverbial “calm before the storm” is unlikely to last long given this week’s busy economic calendar. Later in the week, traders will be bombarded by headlines from Wednesday’s Federal Reserve meeting and the always-impactful Non-Farm Payrolls report on Friday, but the first major development to watch will be the US-China trade negotiations kicking off on Wednesday.
Chinese Vice Premier Liu He will be in Washington this week to speak with his US counterparts, Trade Representative Robert Lighthizer and U.S. Treasury Secretary Steven Mnuchin. With China’s economy showing signs of a major slowdown and US tariffs on Chinese goods set to escalate on March 2nd, the stakes are high. So far, Chinese policymakers have reportedly offered to increase imports from the US in an effort to bring the two countries’ trade balance to zero in six years, but the primary sticking point for President Trump is China’s intellectual property practices.
As we’ve seen with the ongoing Brexit negotiations and the just-concluded US government shutdown talks, trade negotiations often go down to the wire. Indeed, just last week US Commerce Secretary Wilbur Ross stated that the countries were “miles and miles” from resolving their differences, suggesting that a full resolution in the trade war is unlikely this week.
From a trader’s perspective, a bullish outcome for risk assets would likely consist of an optimistic joint statement and a definitive schedule for future talks in the coming weeks. If the two countries are unable to highlight points of agreement or even agree on a schedule for further negotiations, we could see “safe haven” assets rise on the fear that the US tariffs will soon escalate.
Technical View: USD/JPY
USD/JPY has been a good proxy for FX traders’ sentiment in recent weeks. As fears over the government shutdown, economic slowdown, and ongoing trade war peaked around the New Year, the pair dropped collapsed to test a 2+ year low under 105.00. While sentiment and prices have recovered somewhat since then, USD/JPY has only retraced back to its New Year’s Eve levels.
Over the last week and a half, the pair has been contained to a tight, 80-pip consolidation range between about 109.20 and 110.00. Given this week’s busy economic calendar, USD/JPY is likely to break out of its low-volatility range sooner rather than later.
If traders see a lack of progress out of US-China trade negotiations or a more dovish Federal Reserve, USD/JPY will likely break through support at 109.20, opening the door for a quick move down toward the post-flash-crash low in the 108.00 area. Meanwhile, a more positive outcome from this week’s trade negotiations, or a less-dovish-than-anticipated Federal Reserve meeting, could take USD/JPY through resistance at 110.00 and open the door for move up toward 111.00 or 111.50 in short order.
Source: TradingView, FOREX.com
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.