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James Hyerczyk
Japanese Yen

The Dollar/Yen edged higher last week after an early setback. The price action was mostly driven by demand for risky assets, which encouraged investors to shed their positions in the safe-haven Japanese Yen.

The Brexit controversy had little impact on the direction of the Forex pair although it’s still an important enough international event to keep an eye on. The strength at the end of the week suggests the outcome of the trade talks between the United States and China had a bigger influence on the trade.

Last week, the USD/JPY settled at 108.674, up 0.266 or +0.25%.

Specifically, rising Treasury yields in reaction to an easing of tensions between the U.S.-China underpinned the Dollar/Yen, but it was likely a surge in U.S. equities that helped drive the Forex pair higher. The move in U.S. stocks was driven by better earnings and hope of a trade deal.

US-China Trade Relations Underpin Dollar/Yen

The direction of the USD/JPY this week will likely be determined by optimism over a U.S.-China trade deal.

On Friday, the Office of the U.S. Trade Representative said the U.S. and China have made progress in trade discussions and have come close to finalizing parts of a phase one deal.

The agency issued a statement outlining the status of discussions following a conversation that U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin had with Chinese Vice Premier Liu He.

“They made headway on specific issues and the two sides are close to finalizing some sections of the agreement,” USTR said. “Discussions will go on continuously at the deputy level, and the principals will have another call in the near future.”

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Strong Earnings Boost Demand for Dollar/Yen

The S&P 500 Index briefly traded above its record closing high Friday, and came within fractions of its intraday all-time high. Meanwhile, the tech sector closed at a record high.

Earnings reports so far have mostly exceeded Wall Street analysts’ modest expectations. However, many of those that delivered improved results for the quarter have also issued disappointing profit outlooks.

Of the roughly 40% of the companies in the S&P 500 that have reported so far, 80% of them had results that topped Wall Street’s earnings forecasts, while 64% beat revenue estimates, according to FactSet.

Analysts are now saying that earnings from the S&P 500 companies for the July-September quarter will be down 3.7% from a year ago. That’s slightly better than the 4% drop that analysts were initially expecting.

As of Friday, some 38 companies in the S&P 500 had issued earnings forecasts for the fourth quarter. Of those, 26 issued negative guidance and 12 gave a positive outlook.

Weekly Forecast

This week should be a busy week for Dollar/Yen traders because of geopolitical factors, economic news and central bank activity.

The geopolitical factors driving the price action will be Brexit and trade relations between the U.S and China. Both economic powerhouses may even announce an agreement on phase one of their current partial trade deal.

Traders will also get the chance to react to Consumer Confidence data on Tuesday; the ADP Non-Farm Employment Change and the Advance GDP on Wednesday; Personal Spending on Thursday; and the U.S. Non-Farm Payrolls report and ISM Manufacturing PMI report on Friday.

The major event will be the Fed’s interest rate decision and release of its latest monetary policy statement on Wednesday. Traders have priced in a 25-basis point rate cut for weeks so it should be no surprise if they do cut. The surprise will be if they don’t cut. Furthermore, with the October rate cut pretty much a given, investors will be primarily focused on the chances of a December rate cut.

Lastly, the Bank of Japan (BOJ) is leaning toward keeping monetary policy steady next week as stable markets, a truce in U.S.-China trade talks and robust domestic demand give it room to save its dwindling ammunition to battle the next recession, sources told Reuters.

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