USD/JPY Fundamental Weekly Forecast – US-China Trade Deal Uncertainty Makes Japanese Yen Attractive Safe-Haven Investment

Increased demand for safety is driving the Dollar/Yen sharply lower on Monday. Fueling the move is a steep sell-off in the U.S. equity markets. The catalyst behind the selling pressure are a pair of tweets from President Trump, calling for increased tariffs against China in reaction to its slow response to several key areas of the previously pending trade deal.

On Monday, the USD/JPY is trading 110.490, down 0.6103 or -0.55%.Last week, the Forex pair settled at 111.108, down 0.467 or -0.42%.

The reaction in the financial markets was swift and decisive after President Trump said in a tweet Sunday afternoon that the current 10% levies on $200 billion worth of Chinese goods will rise to 25% on Friday. He also threatened to impose 25% tariffs on an additional $325 billion of Chinese goods “shortly.”

Furthermore, although trade negotiations between Washington and Beijing officials are set to resume on Wednesday, the president lamented that the progress is moving “too slowly” as China tries to re-negotiate terms of the deal.

Sources Say China May Cancel Trade Talks

According the Wall Street Journal, China is responding to Trump’s latest tweets by threatening to cancel its trade talks with the U.S. this week. Citing a source, the Journal said Beijing had been surprised by the new threats.

CNBC followed up by saying that two sources briefed on talks confirmed that news to CNBC. The Chinese may back out of negotiations this week after Trump’s escalated tariff threat, they said, abandoning a six-month truce after Beijing waffled on some previously discussed commitments.

Once CNBC source said Chinese Vice Premier Liu He will likely cancel the trip he’d planned for himself and a 100-person delegation for a final round of talks. A second source said Trump’s decision to more than double the tariff rate on $200 billion of goods was meant to send a message to Liu not to come to the U.S. with more “empty offers.”

Weekly Forecast

The turmoil surrounding U.S.-China trade relations is a big event that should influence the USD/JPY all week. The initial reaction to the news was to sell equities and buy safe-haven assets like U.S. Treasurys, gold, the U.S. Dollar and the Japanese Yen. This could develop as the theme of the week because now there is uncertainty regarding a trade deal and investors don’t like uncertainty.

Some stock traders are saying this is an example of “Sell in May, and Go Away”, but I think it is worse. That old adage is based on the belief that it is better to avoid holding stocks during the summer period. However, in this case, since the stock market tends to discount future events, traders may have to start pricing in the possibility that there will be no short-term trade deal between the U.S. and China and traders will have to start taking away some of the premium that has been built into the market.

If Trump’s strategy works and China gives in to his pressure by showing up for the meeting then look for the USD/JPY to reverse back to the upside. If the U.S. and China drift further apart and talks go cold then a weak Dollar/Yen could trend lower over the near-term as investors are likely to continue to shed risky assets.