USDJPY recovery continues

The positive news flow that started midway through last week has continued today. After U.S. President Trump tweeted that “at the request of the Vice Premier of China, Liu He, and due to the fact that the People's Republic of China will be celebrating their 70th Anniversary on October 1st.” the proposed 5% tariff increase from 25% to 30% on U.S. $250bn of imports from China would be delayed from October 1 to October 15.

Trumps tariff back down comes ahead of U.S. - China trade talks scheduled to take place in early October and after China elected not to retaliate to the latest U.S tariff hikes. Also helping to calm frayed nerves, Chinese authorities have continued to guide USD/CNY to a lower daily fix than expected, in effect de weaponising their currency the Yuan.

Highlighting this observation USD/CNY is currently trading ~7.08. Below the level, it was trading on August the 23^rd, the day that Trump announced that the 25% tariff on U.S 250bn of Chinese goods would increase to 30% on Oct 1.

One of the chief beneficiaries of the positive news flow has been USD/JPY building this morning on its impressive recovery from the August 104.45 low. Currently it is testing important resistance in the form of the 200-day ma at 108.15.

While I would expect to this resistance level cap at least in the initial instance, I am mindful that USD/JPY generally displays a positive correlation with U.S. 10-year yields. Yields are trading another 5bp higher today at 1.76%, providing a headache to the momentum type funds positioned for yields to trade lower.

Supported by the prospect of further gains in U.S. 10-year yields, it appears to be only a matter of time before USD/JPY does break and close above 108.15. However, from a trading perspective, we are not inclined to buy USD/JPY upon such an important technical level.

Instead, the preferred strategy is to buy USD/JPY on a corrective pullback to 107.50/30 with a sell stops placed below 106.30. The target for the trade would be a move to 109.00/30.

Source Tradingview. The figures stated are as of the 12th of September 2019. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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