USD/JPY Fundamental Daily Forecast – Investors Placing Big Bets on Some Sort of Trade Deal

The Dollar/Yen is trading sharply higher on Friday on hopes of progress in U.S.-China trade talks. Meanwhile, geopolitical tensions have also eased in Europe amid optimistic comments from Ireland on Brexit.

Helping to fuel the rally is increasing demand for risky assets due to the carry trade, where investors sell Yen and buy dollars to invest in U.S. stock markets.

Rapidly rising U.S. Treasury yields are also helping to widen the spread between U.S. Government bonds and Japanese Government bonds, making the U.S. Dollar a more attractive investment.

At 12:55 GMT, the USD/JPY is trading 108.395, up 0.463 or +0.43%.

On Thursday, President Donald Trump said he’s meeting with Chinese Vice Premier Liu He on Friday, fueling optimism about a positive outcome from this week’s high-level trade talks.

“Big day of negotiations with China. They want to make a deal, but do I? I meet with the Vice Premier tomorrow at The White House,” Trump said in a tweet Thursday.

Additionally, top U.S. and Chinese negotiators wrapped up their first day of trade talks, with U.S. President Donald Trump welcoming what he called a “very, very good negotiations with China”.

Possible Outcomes

“To affirm a temporary trade truce, the second day of trade talks (Friday) will need U.S. President Trump to suspend or cancel the U.S. tariffs that are scheduled to hit on Chinese goods October 15 and December 15,” strategists at Singapore’s DBS Group Research wrote in a note.

Still, in the longer term, the strategists said: “The broader China-US trade war remains unresolved,”

Analysts at J.P. Morgan said in a note they expect four possible scenarios could emerge from the trade negotiations.

First, an “ice-breaking meeting that will lead to a major deal” in the coming months, second, a “mini-deal” focusing on China’s purchase of U.S. products and some structural reforms while new tariffs get postponed indefinitely, third, a no-deal status quo where new tariffs come into play, but negotiations continue, and finally, a break-up scenario, where there’s no deal and no further dialogue between the U.S. and China.

J.P. Morgan analysts said they are expecting a no-deal status quo while “market investors also have high hopes for a mini-deal.”

Daily Forecast

The USD/JPY is going to continue to more higher and could even accelerate to the upside if buyers can take out the recent top at 108.478. This could create the upside momentum needed to challenge the August 1 top at 109.317. A breakout will be triggered by the announcement of any positive news from the trade talks.

However, if the talks end without at least a “mini-deal”, or if Trump says the new tariffs will start on October 15 then look out to the downside. We could see an immediate break into 107.463, followed by 106.890 and 106.471.

Taking out 106.485 will change the main trend to down.