- USD/JPY has gapped to the upside on positive risk sentiment following geopolitical ice-breaking talks.
- The US/Iran risk is somewhat defused by China, U.S. and Korea improved relations.
USD/JPY gapped on the open on Monday as Presidents Trump and Xi agreed to resume trade talks, averting the near term risk of a damaging escalation. In the same vein, Trump visited North Korea, after meeting Kim Jong-un, both countries agreed to set up teams to resume stalled nuclear talks – It's all risk on today!
USD/JPY vaulted the 108 the figure to score a high of 108.51 in a big gap to the upside but has since dwindled back to a current 108.16 Tokyo low. Traders are just not that convinced that all is going to turn out so well, not in the near future anyway as there are many barriers to cross still. For instance, critics have dismissed the N.Korea noise as the two leaders' third face-to-face encounter in just over a year, as a mere political theatre. After all, Trump is heading into his reelection campaign, so its all a little too convenient timing wise, while North Korea still needs to show that it is serious in getting rid of its nuclear weapons.
As for the Sino/US agreement, what it does offer straight away is some glimmer of hope, and certainly dials down the immediate danger of the US imposing tariffs on the remaining $300 billion of Chinese imports “for the time being”. In exchange, China agreed to make unspecified new purchases of US agricultural products. As a reminder, the US is keeping the 25% tariff currently imposed on $250 billion in Chinese goods in place.
US/Sino Agreement looks lopsided
Analysts at Westpac argue the agreement looks lopsided:
"China has returned to the negotiating table by committing to more farm goods purchases, which they likely already wanted to make. It also sounds a lot like the Buenos Aires G20 pledge in late 2018 which didn’t prevent the US administration this year from subsidizing US farmers hurt by the US-China trade war. Thornier national security issues around forced intellectual property transfer, IP theft and state subsidies are likely to be addressed in upcoming talks."
The analysts at Westpac also said that a comprehensive deal is likely to remain elusive. "Talks between the US and China fell apart in May when China allegedly backtracked on substantial commitments including changes to local laws that would enshrine protections for US intellectual property and end forced technology transfers. Two months later, it’s not clear the environment is any more favourable for such changes to be agreed upon."
Meanwhile, there will be a focus back to central banks soon enough with the Federal Reserve meeting later this month. While an interest rate cut is fully priced, there is still the risk for U.S. data to really disappoint in the build-up to the event and this week's Nonfarm Payrolls will be critical. Analysts at TD securities have argued that payrolls will bounce to 150k in June, following the below-expectations 75k May print. "Employment in the goods sector should remain soft, while we look for a modest rebound in the services sector. The household survey should show the unemployment rate remained steady at 3.6%, while wages are expected to rise 0.3% (3.2% y/y) on the back of a favourable reference week."
While there could be good news in the event, we should not discount the following all coming up ahead of the Fed': Consumer prices (Jul 11), retail sales (Jul 16) and advance Q2 GDP (Jul 26).
Analysts at Westpac are suggesting a 50bp rate cut seems very unlikely. "Pricing for such a move was 32% on Friday; in early Monday trade it slipped to 17% (CME Group)."
"So far in June, US confidence surveys have weakened a lot but hard data (durable goods orders & personal spending) suggests the economy is weathering risks in decent shape. Certainly, confidence gauges will recover somewhat in July after the easing in US-China trade tensions. If the data cements that picture in July, it’s not clear the Fed will cut at all July 31; they may well prefer to “closely monitor” for another month," the analysts argued.
The pair has sights on the 108.80's as an upside target while, to the downside, 107.50s are likely to give way on any risk-off bounce to open a run for the 106.80s. "We continue to look for losses to the 78.6% retracement at 105.87," analysts at Commerzbank said on such a bearish correction.