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James Hyerczyk
USD/JPY
USD/JPY

The Dollar/Yen is trading higher early Thursday after posting a volatile, two-sided move the previous session. The Forex pair was supported by increased demand for higher risk assets after a report said the U.S. and China would meet to discuss a possible solution to the lingering trade dispute. Earlier in the session, the Forex pair retreated as lower Treasury yields made the U.S. Dollar a less-attractive investment. Yields fell following the release of weaker-than-expected U.S. economic data.

At 0758 GMT, the USD/JPY is trading 111.466, up 0.213 or +0.19%.

In the U.S. on Wednesday, the Labor Department reported U.S. producer prices unexpectedly fell in August with the weakness led by declines in the prices of food and a range of trade services. The decline could have been worse if not for an increase in the cost of energy products.

Additionally, the Federal Reserve’s latest Beige Book released late Wednesday showed three of the Fed’s 12 districts – St. Louis, Philadelphia and Kansas City – reported weaker growth in August. Fed Governor Lael Brainard

Finally, Fed Governor Lael Brainard said in a speech on Wednesday that the Federal Reserve likely will continue gradual interest rate increases but will accelerate the pace if signs that financial imbalances continue to build.

Also on Wednesday, the Trump administration offered China a new chance to come to the negotiation table to perhaps put an end to the trade dispute. According to reports, it’s just an invitation to resume talks. So far there is nothing formal in the works.

The proposal comes at a critical time because President Trump said last week that new tariffs on $200 billion of Chinese goods could go into effect “very soon” and warned that another, even bigger wave of measures is “ready to go on short notice if I want.”

Forecast

Yesterday’s price action strongly indicated that the Dollar/Yen relationship is being closely controlled by the direction of U.S. interest rates and trader aversion to risk. Any news that helps widen the spread between U.S. Government bond yields and Japanese Government bond yields will be bullish for the USD/JPY. Any news that sends investors out of risky assets will be bearish for the Dollar/Yen.

Optimism over a softening of U.S.-China relations is providing the fuel underpinning the USD/JPY. It is going to take the end of the trade dispute to fuel a meaningful move to the upside by the Forex pair.

U.S. economic data and Fed speakers will likely drive the price action on Thursday. I don’t expect to hear anything major about the U.S.-China negotiations until after the meeting takes place.

In the U.S., Consumer Inflation is expected to have grown 0.3% in August. Core Consumer Inflation is expected to have risen by 0.2%.

Weekly Unemployment Claims are expected to come in at 210K. The Federal Budget Balance is forecast at -169.8 Billion, versus the previously reported -76.9 Billion.

We’re also going to hear from FOMC Members Quarles and Bostic. Traders will be looking for clues as to the pace and the number of interest rate increases to expect the rest of the year and next year.

Technically, there is still a strong wall of sellers sitting at 111.770 to 111.830. It is going to take some extremely bullish news to knock-out these sellers. If the buying is strong enough to overcome the two tops then look for a potential surge to 112.152 over the near-term.

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