USD/JPY Fundamental Weekly Forecast – Unless US-China Officials are Lying, the Week Begins with ‘Cautiously Bullish’ Tone

Mixed comments about the status of trade talks between the United States and China encouraged some investors to seek shelter in the safe-haven Japanese Yen although U.S. stock market investors seemed to read the developments as bullish. This should be the focus for investors this week if last Friday’s price action is any indication.

Last week, the USD/JPY settled at 108.785, down 0.458 or -0.42%.

Hong Kong Violence, Weak Global Data Pressure Dollar/Yen

Uncertainty over a trade deal wasn’t the only factor making the Japanese Yen an attractive asset, ongoing political turmoil in Hong Kong and weak data from Asia and Europe were also factors.

Hong Kong pro-democracy protesters paralyzed parts of the city for a fourth day on November 14, forcing schools to close and blocking highways, as students build campus barricades and the government dismissed rumors of a curfew. Earlier in the week, protests took a violent turn, heightening an already volatile situation days after a group of pro-democracy lawmakers was arrested in the city.

On the data front, China’s factory output growth slowed more than expected in October, Japan’s economy ground to a standstill in the third quarter and the German economy only narrowly avoided a recession in the third quarter. In Australia, weaker-than-expected employment data sent a signal that the recent rate cuts aren’t helping to revive the economy.

Weekly Forecast

Hopes that the United States and China may soon end their trade war after a pair of high-ranking White House officials drove down demand for the safe-haven Japanese Yen on Friday. This move could continue this week if the optimism prevails.

White House economic adviser Larry Kudlow said on Thursday that negotiations over the first phase of a trade agreement with China were coming down to the final stages, with the two sides in daily contact.

Speaking after an event at the Council on Foreign Relations late on Thursday, Kudlow told reporters that a deal was close though “not done yet,” Bloomberg reported.

“We are coming down to the short strokes,” Kudlow said in Washington. “We are in communication with them every single day right now.”

U.S. Commerce Secretary Wilbur Ross said in an interview on Fox Business Network Friday that there was a very high probability the United States would reach a final agreement on a phase one trade deal with China.

“We’re down to the last details now,” Ross said.

Furthermore, there was a potentially bullish development over the week-end. According to Chinese state media, Chinese Vice Premier Liu He spoke with Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer about a phase-one trade deal in a phone call Saturday morning.

The two sides had “constructive discussions” about “each other’s core concerns” and agreed to remain in close contact, Xinhua reported. The call came at the request of Mnuchin and Lighthizer, according to Xinhua.

If it were “unnamed sources”, or anyone other than Kudlow and Ross making the comments about a trade deal, or even President Trump, I’d still be skeptical about how close the U.S. and China are to completing “phase one” of a bigger deal. The fact that Chinese state media further adds to the optimism surrounding a deal.

Nonetheless, there are still skeptics out there. “To be blunt, such rhetoric is more or less the same as Steven Mnuchin (who) said months ago that a deal was ‘99% done’, Commerzbank analysts wrote in a note to clients, though they acknowledged the comments had benefited sentiment.

Given the past history of the two economic powerhouses during negotiations and the upbeat developments, I am going to start the week “cautiously bullish” the USD/JPY.