USD/JPY Fundamental Weekly Forecast – Could Plunge if US-China Trade Talks Have Stalled

The Dollar/Yen finished higher last week on profit-taking amid an easing of tensions over U.S.-China trade relations and better-than-expected U.S. economic data. Gains were limited, however, by another weekly dip in U.S. Treasury yields.

Throughout the week, the Forex pair was guided higher by a positive outlook for U.S.-China trade relations. Treasury Secretary Steven Mnuchin told CNBC the two countries are “still in negotiations.” President Trump followed up by saying the U.S. is in a “great position,” noting that “our economy has been very powerful; theirs has not been.”

The price action suggested that investors seem content with the comments, and perhaps the worst of the situation is over now that the U.S. has followed through on its threat to impose new tariffs and China retaliated as expected.

Last week, the USD/JPY settled at 110.068, up 0.120 or +0.11%.

Positive reports from the U.S. and a steady tone by most Fed speakers also underpinned the Dollar/Yen. In the U.S. the key positive developments were a jump in the Empire State Manufacturing Index from 10.1 to 17.8, a surge in the Philly Fed Manufacturing Index from 8.5 to 16.6 and better-than-expected Housing Starts data. Weekly Unemployment Claims also showed a strengthening jobs market, coming in at 212K, lower than the 220K forecast.

The biggest drag on the Aussie and Kiwi was the unexpected rise in consumer sentiment. According to the University of Michigan, consumer sentiment jumped to 102.4, soundly beating the 97.8 forecast. This helped reduce the chances of a U.S. recession and a rate cut by the Fed.

In Japan, increased Bank Lending was a positive, but this was offset by a worse-than-expected Tertiary Industry Activity report.

Weekly Forecast

This week’s price action will continue to be driven by the direction of U.S. Treasury yields and demand for risky assets. The catalysts are likely to be U.S. economic activity including a speech by Fed Chair Powell, the Fed minutes and a report on Durable Goods. The major catalyst will be U.S.-China relations.

The minor reports in Japan include Preliminary GDP, Revised industrial Production, Trade Balance and Flash Manufacturing PMI.

Trade Talks On or Trade Talks Off?

Traders are likely to pay particular attention to U.S.-China trade relations and its impact on U.S. stock markets. This is because a report on late Friday turned the stock market lower, erasing earlier gains.

Sources told CNBC’s Kayla Tausche that scheduling discussions for further trade talks have been put on hold since the Trump administration has increased scrutiny of Chinese telecom companies. A U.S. delegation had been invited to Beijing earlier this week.

If sentiment shifts from short positive to long-term negative then stocks could break sharply this week, sending money flying into the safe-haven Japanese Yen.

In my opinion, this is likely to be the major catalyst to watch this week.