USD/JPY – where next with risk?

Trading the trade risks

While USD/JPY had first broken below the August 2017 low on account of the softer-than-expected Japanese GDP figures, the eruption of concerns surrounding the on-going US-China trade skirmish had been one to send the currency pair to a fresh sixteen-month below the $105 figure. President Donald Trump’s unexpected orders to look into the $60 billion worth of retaliatory tariffs in March sparked off a bout of tit-for-tat reactions that gave yen traders much to follow.

It is interesting to note, however, that following the initial reaction, the yen as a proxy of risk had actually progressively softened against the US dollar on hopes of conciliation. Technically speaking, USD/JPY certainly presented us with an inverse head-and-shoulder pattern that had seen its neckline at around $106.90 broken, which could present us with a potential squeeze towards the recent downtrend at around the $108 figure. President Xi Jinping’s latest speech at the Bo’ao forum had been viewed as the offering of an olive branch in the current tit-for-tat retaliation fashioned trade dispute, with positive response from his US counterpart. While it may still be too early to judge, we could be staring at the semblance of the light towards the end of the current trade skirmish tunnel, which may also mean that the impact from trade sentiment could start to wear out.

Bank of Japan’s monetary policy

Certainly few are expecting an all-out trade war, even if we should let our jitters be revealed through price action. With this thought in the mind, we should remain cognizant that over the long run, monetary policy may remain the primary driver and the actions of the Bank of Japan (BoJ) would be key. The Japanese central bank remains one of the most dovish amongst advanced economies central banks, but even so, expectations are for the BoJ to taper in the longer term that keeps USD/JPY on a downward bias.

Look for prices to remain in the downtrend on longer term expectations. Although, the risk-induced volatility could continue to see yen pairs experiencing more two-way fluctuations. Stronger resistance seen currently at the $108 figure while support comes in at $105.5 ahead of $104.59, ones to watch.

USD/JPY chart