USD/JPY: Bulls capped as Asia digests Trump/Xi ceasefire but weigh up the detail

• USD/JPY has been capped following a bullish gap that opened the week due to what appears to be a willingness from China to play ball with the US trade accord requirements.  
• USD/JPY rallied on an opening bid to 113.64 and onto 114.82 before fading back to towards the 10-hr SMA at 113.61.
• Currently, USD/JPY trades at 113.68 in Tokyo.

USD/JPY rallied on the off as a trade war truce between Washington and Beijing looks to be in the makings. Xi and Trump, along with officials, sat down to dinner on Saturday in Argentina where the G20 has been taking place.  The outcome of the meeting is a positive step towards a free trade agreement, although there are many stumbling blocks to go and tariffs remain in place.  

Weighing up the detail

However, that US have agreed to hold off the previously scheduled 1 January 2019 tariff increase from 10% to 25% and in exchange China will purchase, “a very substantial amount” of US goods. There will be a 90-day negotiation window to address US concerns about forced technology transfer and protection of intellectual property, after which tariffs will rise if there is no agreement.  

Repatriation flows to support a downtrodden  dollar

Such an outcome was half expected and is probably about as much that could have been reasonably foreseen at these initial stages of what appears to be a willingness from both parties to resolve their dispute for the sake of their own and the broader global economy. We are entering the final weeks of the year and that usually means dollar repatriation that gives the greenback an edge into the new year. Also, stocks have rallied in Asia on the trade sentiment and so to have futures in the US indices – (Dow Jones futures jumped 1.6% vs. fair value. S&P 500 futures raced 1.4% higher. Nasdaq 100 futures ran up 1.7%). This leaves a bullish bias on a fundamental basis for USD/JPY that closely correlates with risk sentiment and stock market activity.  

However, the recent Powell speech whereby he was  confirming suspicions on the street that the Fed is nearing its neutral range target which could bring the end of the Fed’s current path of interest rate hikes closer to the end; This has made for a downtrodden greenback and a bearish outlook for 2019.

USD/JPY levels

Support levels: 113.20 112.90 112.55    

Resistance levels: 113.60 114.05 114.50

Valeria Bednarik, Chief Analyst at FXStreet explained that the pair has spent the last 4 weeks inside a well-limited 200 pips’ range, unable to extend gains beyond the 114.00 figure beyond a couple of short-lived spikes:

“The base of the range is 112.30, the low set on November 20. In the daily chart, the 100 DMA comes at 112.25, reinforcing the support area and indicating an increased downward potential on a break below the level. Technical indicators in the mentioned time frame lack directional strength around their midlines, reflecting the lack of directional strength. Shorter term, and according to the 4 hours chart, the pair offers a neutral-to-bearish stance, holding above directionless moving averages, as technical indicators turned lower, the Momentum already within negative levels and the RSI currently at 51. Should the pair regain the 114.00 level, the next relevant resistance comes a 114.54, October monthly high.”