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Is the US economy as strong as the latest statistics suggest? What does Donald Trump think about rolling back import duties? And will Jerome Powell open the door to further lower the federal funds rate? The answers to these questions should be given by the week of November 15, and its most interesting currency is the Japanese yen. The USD/JPY pair is sensitive to both trade wars and US data. But could it be otherwise, if an improvement in the latter leads to an increase in the yield of treasury bonds, an increase in the differential in the rates of the US and Japanese debt markets and a weakening yen?
Dynamics of USD/JPY and US bond yields
The analyzed pair failed on the first attempt to storm the important resistance at 109.35 due to the owner of the White House. Donald Trump claims that the issue of tariff rollbacks has not yet been resolved, that China wants a deal more than the States, and the latter can dictate their terms. As a result, global risk appetite has faltered somewhat, and the demand for safe-haven assets has increased. Moreover, at the end of October, consumer prices in China jumped from 3% to 3.8% y/y, which significantly reduces the ability of the People's Bank to stimulate the economy in monetary terms. Let me remind you that China's GDP is growing at the slowest pace in the last few decades, and the "bears" on USD/JPY have benefited from this for most of this year.
I don't think that the US president intends to launch a correction on the S&P 500 with his speech at the New York Economic Club. I expect him to be moderately optimistic about a deal with Beijing. He would allow Jerome Powell to stick to the old plan of action in his speech to Congress the next day. That is, to talk about the expediency of a long pause in the process of changing the federal funds rate. On the contrary, the aggressive rhetoric of the owner of the White House will increase international risks and the opportunity to hear from the Fed Chairman words about the resumption of the cycle of monetary expansion. In the first scenario, which I call "basic," the USD/JPY pair will continue its northern campaign; in the second, it has good chances to go below 108.
At the end of the week to November 15, the release of retail sales data will convince or, conversely, disappoint investors on the strength of the American economy. Before that, impressive statistics on employment, inflation, business activity, and trade balance led to a rise in US debt market rates and to the exit of the entire yield curve in the green zone, which has not happened since November last year. This fact supports the dollar and provides a solid foundation for the USD/JPY rally.
Technically, the further fate of the pair will depend on the ability of the bulls to storm the resistance at 109.35 (pivot level). It will turn out – the risks of implementing the target by 224% on the AB=CD pattern will increase. On the contrary, the fall of quotations below the lower border of the upward trading channel will be a serious problem for buyers of USD/JPY.
USD/JPY, the daily chart
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