- USD/JPY gapped higher yesterday but tailed off in European and US markets, more solid in Tokyo.
- Technically, retains a negative tone.
USD/JPY gapped higher on Monday on a day-day closing basis, as markets move out of safe havens following a more upbeat outlook for trade negotiations between China and the US while Trump announces that a deal between the US and Mexico has been secured. Trump is supposed to meet with Xi and Trump confirmed today that additional tariffs on Chinese goods will be levied if Chinese President Xi Jinping does not attend this month’s G-20 meeting. Meanwhile, as per Mexico, it seems that that risk has been abated, for now. Trump made announcements late Friday, post-market close, that a deal had been struck and that tariffs have been indefinitely postponed.
However, there is an air of caution around all of this and USD/JPY did give back some ground, unwinding the opening gap. Levies on another $300 billion in Chinese goods could be in store for Chinese imports if a trade agreement is not reached soon – (There was an increase of tariffs last month on $200 billion worth of goods the U.S. imports from China). And as far as Mexico goes, Trump warned that should Mexico not fulfil their part of the deal, tariffs will be imposed in all Mexican imports.
However, for the time being, at least, the pair popped while the US 10yr treasury yields rose from 2.12% to 2.14%, while 2yr yields ranged sideways between from 1.87% and 1.90%, still up from 1.85% Friday. Analysts at Westpac noted that markets are pricing an 85% chance of a Fed fund rate cut by August, with a total of three cuts priced by May 2020.
The week ahead
Looking ahead, following the dismal nonfarm payrolls report, this week’s US CPI and Retail Sales better be impressive or the dollar faces a fierce backlash.
Analysts at TD Securities offered their outlook for both US CPI and retail sales as follows:
- “We look for headline CPI to slow to 1.8% in May on the back of a 0.1% monthly gain. The softer monthly increase is largely the result of a normalization in energy prices.
- Core inflation should remain steady at 2.1% y/y, reflecting a firm 0.2% m/m advance. Although we pencil in a softer 0.2% m/m increase in core services, we expect a long-delayed rebound in core goods (+0.2%).”
- “We expect a firm increase in auto sales to be the main driver behind a 0.8% rise in the headline measure for May. Although we expect sales at gasoline stations to
- remain supportive of the headline figure, it will be at a lower magnitude that reflects stabilization in gasoline prices. Furthermore, we anticipate sales in the key control group to rebound modestly at 0.2% m/m.”
Valeria Bednarik, the Chief Analyst at FXStreet, explained that with the upside capped by the 108.70 area, USD/JPY was confined to a horizontal phase bounded by the 100-hour SMA on the downside.
“From a technical view, indicators in 4-hours charts have turned flat, but still above their midlines, while from a wider perspective USD/JPY retains a negative tone despite today’s price action. The Dollar needs to regain the 108.90 area (23.6% retracement of the 112.40/107.80 fall) to ease the immediate pressure and attempt a recovery towards 109.25 (20-day SMA). Meanwhile, as the downside remains favoured, a retest of the 107.80 support area seems likely, with a break there paving the way to 107.50 ahead of 106.60.”
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