- USD/JPY was finding resistance at 109.88 highs last week and spent the last phase of the closing session drifting lower despite a well-bid greenback.
- There remains an air of caution over rallies in risk apatite which leaves USD/JPY vulnerable. However, Friday’s price action was mostly bid, with a rise from 109.06 to 109.59 into the New York open.
Bulls picked up the baton in NY and took the price off the aforementioned highs before drifting into a North American close of 109.69. With mixed earnings reports, the stock markets took bullish cues from geopolitical and domestic political news instead. The U.S. government’s partial shutdown was in its 28th day on Friday and investors are fretting over the ramifications for the US economy that a prolonged political standoff could damage.
“The partial federal government shutdown enters its fourth week, the longest on record in modern times, with no end in sight. The adverse effects on the US economy grow geometrically with the length of the shutdown; the CEA estimates the GDP growth drag is now 0.13pp per week. At this point, the earliest Dec PCE inflation or Q4 GDP growth will be released is well into February,” analysts at TD Securities noted.
Sino/US trade dispute
However, there was some optimism over a potential bilateral deal along with glimmers of hopes of a resolution soon to the Sino/Chinese trade dispute which helped to offset worries over the prolonged partial government shutdown and mixed corporate results which supported US stocks and risk appetite, weighing on USD/JPY – (The Dow Jones Industrial Average, DJIA, climbed 336.25 points, or 1.4%, to close at 24,706.35 for a weekly gain of 3%. the S&P 500 index added 34.75 points or 1.3% and the Nasdaq Composite added 1%).
The upbeat expectations on trade were reinforced by the Bloomberg report that Chinese officials have offered to increase imports from the U.S. by $1 trillion over the next six years, leading the stock market to close higher on Friday, extending its winning streak to a fourth session.
Week ahead
For the week ahead, eyes will stay on the US government shutdown, Sino/US relations as well as the World Economic Forum in Davos and Chinese growth with Q4 Chinese GDP.
“Activity data for Oct/Nov and Dec qtr PMIs were weak, all pointing to slower GDP. Composite manufacturing PMIs slipped to 49.9 while services PMIs were elevated at 53.3. Retail sales/IP momentum points to GDP easing from 6.5% to 6.4%/y. Trade is supportive for growth as the slump in imports (-10%/q in nominal terms) outpaced the 2.5%/q fall in exports. Mkt range 6.2%-6.4%,”
analysts at TD Securities explained.
USD/JPY levels
Support levels: 109.40 109.05 108.65
Resistance levels: 110.00 110.45 110.90
Valeria Bednarik, Chief Analyst at FXStreet explained, the pair is poised to extend its advance according to technical readings in the daily chart, as technical indicators entered bullish territory, maintaining their strong upward slope:
“The pair has also surpassed the 61.8% retracement of its 111.41/105.16 decline at 109.05, which opens doors for a test of the upper end of the range. Moving averages in this chart, however, remain above 111.50, putting at doubt a longer-term advance. In the 4 hours chart, technical indicators have lost directional strength at their weekly highs, with the RSI consolidating in overbought territory. The 100 SMA converges with the mentioned Fibonacci support, reinforcing the 109.00 region as support.”
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