EUR/JPY brushing aside Hong Kong risk, takes a hit on latest trade-deal headlines

At the time of writing, EUR/JPY is trading offered again following the latest trade headlines, albeit holding through the cluster of the 21/50 and 200-hour moving averages, (relatively bullish), at 120.15  having travelled from a low of 119.84 to a high of 120.40.

• Phase One’ US-China trade deal may not be completed this year – Reuters  

The mood in the equity space had been  relatively  robust until the Reuters report that a  Phase One’ US-China trade deal may not be completed this year,  considering the expectations that the Federal Reserve and even the most dovish of central banks, such as the Reserve bank of Newzealand, are now on hold as well the mounting geopolitical risks.  EUR/JPY, which positively correlated to the performance of global equities, is currently -0.08%, previously recovering in tow with stocks on Wall Street which opened lower following a lacklustre performance in European  markets.

Risks associated with the bill on Hong Kong human rights

There is a keen focus on both Brexit and global trade relations, and the recent vow of retaliation from China if President Donald Trump signs the bill on Hong Kong human rights which was rushed through the Senate yesterday has markets in ‘red alert’ – something that will likely support the Yen (for its safe-haven status), and weigh on risk sentiment and the value of global equities.  

The city of Hong Kong currently enjoys a privileged status with both the US and Europe on economic and trade matters and markets fear risks associated to global trade considering Hong Kong geographic position, trade flows and it middle man status between the US, China and Europe. Moreover, Hong Kong is a relatively  advanced and highly developed free-market  economy, yet should the belt be tightened on the city, contagion in globalised financial markets could play havoc on market risk sentiment, which is indeed something that EUR/JPY would be tangled up within considering its close ties to the performance of global equities.

However, at this juncture, markets are of the view that Trump would veto the bill in order to maintain a course towards securing a trade deal with China, and for that reason, the risk is being brushed aside for the meanwhile. Moreover, it may take a number of weeks before the two versions of the  bill with  differentiating content  and discrepancies will be finally reconciled by a congressional committee – only then can  the legislation  be sent to US President Donald Trump, who must agree to sign it into law. So, it is very much much a case of ‘keep calm and carry on’ in financial and global markets. However, the worry now is the lack of a sense of urgency for the completion of a ‘Phase one deal’.

FOMS minutes preview  

Looking ahead, the Federal Open Market Committee minutes are due today. The minutes will likely confirm that the Federal Reserve, for now, is through providing insurance and are indeed on hold. Traders will, however, scrutinise the working and anything that is surprisingly dovish could lend a further hand to risk appetite, US stocks and ultimately lift EUR/JPY. Indeed, there is still plenty out there for the Fed to be concerned about which should reflect an easing bias. However, it is how much of an easing bias that will conclusively impact markets.  

See  FOMC Minutes  Preview:  Reinforcing the rate pause

EUR/JPY levels

EUR/JPY is subdued below the 200-day moving average and capped by the 50% mean reversion of the mid-March to Sep range. The price is oscillating around the 23.6% of the same range, testing the hourly MA cluster on the latest trade headlines –  ‘Phase One’ US-China trade deal may not be completed this year – Reuters