• 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.

USD/JPY levels

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.

The People's Bank of China (PBOC) has set the Yuan reference rate at 6.8716 versus Friday’s fix of 6.8747.

It should also be noted that the PBOC will skip open market operations today.

  • Sluggish China PMI, WTI pullback, triggers the USD/CAD pullback from the 8-month low.
  • Few more Manufacturing PMIs are in the spotlight for fresh direction.

Not only US Dollar (USD) strength on the back of successful trade truce between the US and China but latest pullback of crude prices also trigger the USD/CAD pair’s U-turn from February lows as it takes the bids to 1.3095 during early Monday.

The US Dollar (USD) recovered some of its previous losses as traders turn greenback friendly after the US President Donald Trump and his Chinese counterpart shook their hands to indicate temporary trade truce after the Saturday night dinner.

While the trade positive news should ideally help the commodity-linked currencies like the Canadian Dollar (CAD), a pullback of Canada’s largest export item crude weakened the Loonie.

Crude prices fail to portray the trade ceasefire between the world’s two largest economies amid receding geopolitical tension between the US and Turkey, coupled with uncertainty surrounding the extension of the global production cut agreement between the Organization of the Petroleum Exporting Countries (OPEC) and its allies.

Additionally, sluggish prints of China’s official Manufacturing and Non-Manufacturing Purchasing Managers’ Index (PMI) could also be cited as a reason for the pair’s U-turn.

Moving on, China’s Caixin Manufacturing PMI can act as an immediate catalyst for the pair ahead of the US manufacturing PMIs from Markit and the ISM. As per the market consensus, China’s private manufacturing gauge could weaken to 50.0 from 50.2 prior whereas its counterpart from the US Markit might remain unchanged at 50.1. Further, the US ISM Manufacturing PMI is expected to decline to 51.0 from 52.1.

Technical Analysis

The pair should successfully clear late-February low of near 1.3113 in order to regain its stand above 1.3150, if not then November 2018 bottom surrounding 1.3050 and 1.3000 round-figure seem close supports to watch.

  • 38.2% Fibonacci retracement limits EUR/JPY upside towards 100-D EMA.
  • A downside break of 50-D EMA highlights 23.6% Fibonacci retracement and 21-D EMA as supports.

Despite successfully trading beyond 50-day exponential moving average (50-D EMA), the EUR/JPY pair can’t rise farther as 38.2% Fibonacci retracement of March – June downpour limits the quote’s advances as it trades near 122.90 during early Monday.

While 122.88 comprising 50-D EMA acts as immediate support, a break of which can drag the pair to 23.6% Fibonacci retracement level of 122.35, close to 21-D EMA level of 122.29.

In a case where prices keep declining past-122.29, June 25 low of 121.65 and the June month bottom surrounding 120.78 can reappear as quotes.

Alternatively, a 38.2% Fibonacci retracement level of 123.34 holds the key for the pair’s run up to 100-D EMA level of 123.89.

Also, the pair’s sustained rise above 123.89 enables it to challenge 50% Fibonacci retracement level of 124.14.

EUR/JPY daily chart

Trend: Pullback expected

  • USD/IDR traders remain cautious ahead of the key Inflation data.
  • The US PMI data will also entertain momentum traders.

USD/IDR seems apathetic to the latest trade truce between the US and China as it takes the round to 14,128 during early Monday. The pair traders remain cautious ahead of monthly inflation data from Indonesia while US PMIs will direct market moves afterward.

Following the Bank Indonesia’s (BI) status-quo rate-decision, comments from the central bank’s Deputy Governor, Dody Budi Waluyo, that the Indonesian central bank is "open" to cutting interest rates exerted downside pressure on the pair.

However, the sideways trading persists amid lack of fresh catalysts from Indonesia. As a result, today’s June month Inflation and Core Inflation data will be the key to watch. Forecasts suggest Inflation weaken to 0.54% versus 0.68% MoM reading and to 3.18% from 3.32% on a yearly format. Though, Core Inflation (YoY) isn’t expected to change from 3.12%.

Other than Indonesia data, the US manufacturing purchasing managers’ index (PMI) from the Markit and the ISM will also be important to watch. While the Markit gauge may remain unchanged at 50.1, its counterpart from the ISM is likely to soften to 51.0 from 52.1 prior during June.

Technical Analysis

Unless breaking a five-month-old support-line, at 14,090 now, chances of the pair’s U-turn to 50-D EMA level of 14,241 can’t b denied. Meanwhile, April month low near 13,974 can please sellers past-14,090 break

  • 138.33, 61.8% Fibonacci retracement cap short-term advances.
  • Sustained downside beneath 21-D EMA can recall latest lows on the chart.

Having breached 21-day exponential moving average (21-D EMA), GBP/JPY seems well inclined to extend its latest recovery as it takes the round to 137.55 during early Monday morning in Asia.

In doing so, June 11 top near 138.33 and 23.6% Fibonacci retracement of March to June month downpour near 138.51 are likely immediate resistances to watch.

Should prices manage to cross 138.51, 50-D EMA level of 139.22 and 140.00 round-figure may gain market attention.

On the downside break of 137.36 comprising 21-D EMA, the pair can recall June 04 low of 136.54 ahead of highlighting June end bottoms surrounding 135.80 and the previous month low near 135.37.

GBP/JPY daily chart

Trend: Bullish