USD/JPY Fundamental Daily Forecast – Increased Risk Appetite Supportive, but Dollar/Yen Still Facing Headwinds

An easing of tensions over the financial crisis in Turkey and news that a Chinese delegation will travel to the United States late in August to hold trade talks is helping to reduce risk aversion enough on Thursday to underpin the Dollar/Yen.

At 0911 GMT, the USD/JPY is trading 110.032, up 0.009 or +0.07%.

Dollar/Yen short-sellers, who have dominated the trade since late last week, began covering positions early Thursday after China’s Ministry of Commerce said it had received an invitation from the United States for talks to be held with U.S. Under Secretary of Treasury for international Affairs David Malpass.

CNBC said, “The news that the world’s two biggest economic powers, currently locked in a trade war, were showing a willingness to negotiate boosted investor sentiment after a worrying week.”

The Yen has been drawing strength since August 1 following the release of monetary policy statements from the Bank of Japan and the U.S. Federal Reserve. Over the past week, its strength increased after a tough week for emerging market currencies, initially led by the rout in the Turkish Lira. The currency plunged to an all-time low at the start of the week as tensions between Ankara and Washington flared and worries over President Tayyip Erdogan’s economic policies increased.

Tensions starting easing on Wednesday as the Turkish government stepped in to shore up its economy and currency.

In other news, Japan’s Trade Balance came in lower than expected. According to Japan’s Ministry of Finance, Japan’s Merchandise Trade Balance contracted by much more than expected, sinking to 231.2 billion Yen compared to the expected 41.2 billion Yen.

In the U.S. on Wednesday, Core Retail Sales rose 0.6%, more than the expected 0.3%, however, the previous month was revised lower to 0.2%. Retail Sales were up 0.5% versus 0.1%. The previous month was also revised lower to 0.2%.

The Empire State Manufacturing Index rose to 25.6, up from 22.6 and better than the 20.1 forecast. Preliminary Nonfarm Productivity increased to 2.9%. Preliminary Unit Labor Costs were down 0.9%.

Capacity Utilization was 78.1%, in line with expectations. Industrial Production was 0.1% below expectations. Business Inventories rose 0.1%.

Forecast

Today’s price action will be dictated by investor aversion to risk. If demand for higher risk assets continues to increase then look for the USD/JPY to be underpinned.

The news about the trade discussion between the U.S. and China is just a headline. However, investors seem to like it. There’s no guarantee that the trade discussions will end successfully, however, the news seems to have stopped the speculative selling for now.

The size of any counter-trend move today in the USD/JPY today will be dictated by the situation in Turkey. If the Lira continues to improve then Dollar/Yen shorts are likely to cover. However, there are some worries that the financial tensions in Turkey will morph into political tensions because the stand-off between the U.S. and Turkey could bring the country closer to countries like Russia, China and Iran, increasing geopolitical risks in the region.

Today’s U.S. economic data includes reports on Building Permits, Housing Starts, Philadelphia Fed Manufacturing and Weekly Unemployment Claims.