USD/JPY Fundamental Weekly Forecast – Partial Trade Deal Means Risk Still Exists

The announcement of the first phase of a substantial trade deal was obviously bullish for the Dollar/Yen, but since there was so much long speculation ahead of the announcement, most of the good news was probably priced into the Forex pair.
James Hyerczyk

The Dollar/Yen rose sharply last week with the buying driven by a rise in Treasury yields and increased demand for higher-yielding assets. The catalyst behind the rally was speculation and the actual announcement of a partial trade deal between the United States and China. Treasury yields rose as investors sold their bond hedges. Stocks were up on the hopes that additional trade deals in the future would ease concerns over a possible U.S. recession.

Last week, the USD/JPY settled at 108.427, up 1.516 or +1.42%.

The dollar was also underpinned against the Japanese Yen as the chances of a 25-basis point rate cut at the end of October dipped from 93.5% to 75.4%.

Dollar/Yen Rise Driven by Higher Yields, Demand for Stocks

The USD/JPY rose last week as the spread between U.S. Government bonds and Japanese Government bonds widened, making the U.S. Dollar a more attractive currency than the Japanese Yen. Furthermore, investors sold long positions in Japanese Yen placed as a hedge against a risky global economy.

Rising stock prices also contributed to the Japanese Yen’s weakness as it kicked off the carry trade whereby investors borrow in Japanese Yen then converted the proceeds into U.S. Dollars to invest in U.S. equity markets.

Partial Trade Deal the Catalyst

The Dollar/Yen was relatively flat for about three days last week before speculation over a potential partial trade deal started to drive it higher last Wednesday/early Thursday. The Forex pair accelerated to the upside after President Trump tweeted at the midday on Friday that “Good things are happening at China Trade Talk Meeting.”

Near the end of the trading session, President Trump said China and the U.S. reached the first phase of a substantial trade deal that delays tariff hikes that were set to kick in this week.

Late in the session on Friday, Trump told reporters at the Oval Office that phase one of the trade deal will be written over the next three weeks.

As part of this phase, China will purchase between $40 billion and $50 billion in U.S. agricultural products. Trump also said the deal includes agreements on foreign-exchange issues with China. In exchange, the U.S. agreed to hold off on tariff hikes that were set to take effect Tuesday.

Additionally, Treasury Secretary Steven Mnuchin said both sides struck an “almost complete agreement” on currency and financial services issues. Phase two of the deal will “start almost immediately” after the first one is signed, Trump said.

Weekly Forecast

The announcement of the first phase of a substantial trade deal was obviously bullish for the Dollar/Yen, but since there was so much long speculation ahead of the announcement, most of the good news was probably priced into the Forex pair.

Now traders have two weeks to mull over a potential rate cut by the Fed, and the Bank of Japan, on October 30 and October 31 respectively. Additionally, investors have about 3 weeks to decide the outcome of the second partial trade deal. This carries some risk so I don’t think the USD/JPY is poised to just take off to the upside.

Furthermore, Morgan Stanley says President Donald Trump’s partial trade deal with China is an “uncertain” arrangement at best and there does not appear to be a viable path to reduce existing tariffs at the moment.

As long as the current tariffs remain in place, the global economy can continue to weaken so chasing the USD/JPY higher at current levels on the news is a risky buy in my opinion. Continue to monitor Treasury yields. They are the best indicator. Higher yields will be supportive. Lower yields could encourage Dollar/Yen traders to reduce their long positions.

Don't miss a thing!

Discover what's moving the markets. Sign up for a daily update delivered to your inbox

Latest Articles

See All

Expand Your Knowledge

See All
The content provided on the website includes general news and publications, our personal analysis and opinions, and contents provided by third parties, which are intended for educational and research purposes only. It does not constitute, and should not be read as, any recommendation or advice to take any action whatsoever, including to make any investment or buy any product. When making any financial decision, you should perform your own due diligence checks, apply your own discretion and consult your competent advisors. The content of the website is not personally directed to you, and we does not take into account your financial situation or needs.The information contained in this website is not necessarily provided in real-time nor is it necessarily accurate. Prices provided herein may be provided by market makers and not by exchanges.Any trading or other financial decision you make shall be at your full responsibility, and you must not rely on any information provided through the website. FX Empire does not provide any warranty regarding any of the information contained in the website, and shall bear no responsibility for any trading losses you might incur as a result of using any information contained in the website.The website may include advertisements and other promotional contents, and FX Empire may receive compensation from third parties in connection with the content. FX Empire does not endorse any third party or recommends using any third party's services, and does not assume responsibility for your use of any such third party's website or services.FX Empire and its employees, officers, subsidiaries and associates, are not liable nor shall they be held liable for any loss or damage resulting from your use of the website or reliance on the information provided on this website.
This website includes information about cryptocurrencies, contracts for difference (CFDs) and other financial instruments, and about brokers, exchanges and other entities trading in such instruments. Both cryptocurrencies and CFDs are complex instruments and come with a high risk of losing money. You should carefully consider whether you understand how these instruments work and whether you can afford to take the high risk of losing your money.FX Empire encourages you to perform your own research before making any investment decision, and to avoid investing in any financial instrument which you do not fully understand how it works and what are the risks involved.