USD/JPY buyers have 'got the gun locked and loaded', what's next?
All they need is positive reinforcement from trade talks to pull the trigger
The yen is once again the weakest major currency as we head towards European trading as risk looks to be in a better mood to start the day. Asian stock gains are more measured as US equities pared gains ahead of the close yesterday, but so far sentiment on the new day remains relatively optimistic.
E-minis are trading 0.4% higher, US 10-year yields are up by 2.5 bps to 2.679% and risk assets don't seem to be hurt all too much by the fact that the Chinese yuan is weakening (more so that the dollar is strengthening).
Buyers have been knocking on the door of the 110.00 handle since last week but finally were able to find a bit of a breakthrough yesterday. Technically, there isn't much stopping the pair from running higher towards a test of the 200-day MA (blue line) @ 111.29 next before resistance around 111.40 comes into play.
However, with US-China trade talks only set to take on more serious discussions later in the week, you can understand why buyers are a little hesitant to push the issue here.
I remain a little skeptical of the "breakout" in the pair here as I still see any further upside being contained unless markets are certain of the outcome of trade talks. Any slight hints of positive reinforcement will easily be able to tip the scales and push the pair much higher from here. But again, those have been a bit hard to come by recently.
With the dollar holding firm and technical levels still supportive (risk sentiment also), the pair could still inch higher in the sessions ahead but I don't foresee it making a run towards 112.00 or beyond without positive developments in Beijing.
I still believe we'll see both the US and China putting a positive spin upon the conclusion of talks and perhaps delay the 1 March deadline to a future date, postponing tariff increases. Markets will cheer the news but really, it's still tough to envisage a major trade breakthrough for now.
USD/JPY has decent upside potential on the news but I would expect the euphoria to die down after a couple of days and markets will settle back on the narrative that the global growth slowdown is not going to disappear any time soon. That's when the long trade in the yen will start to look really attractive.