USD/JPY holding the the 105 handle but risk-off points to further declines

USD/JPY probed lower to 105.05 to mark a seven-month low overnight following another flight to safety as geopolitics continue to mount up while the Yen plays out its safe-haven role in the FX space. In Tokyo with Japan back, and in Asia in general, risk-off was following suit at the open amid an overhang from the US-China trade war and Hong Kong unrest, as well as fears of China intervention. Japan opened with the Nikkei 225 (-1.6%). 

For US benchmarks, the Dow Jones Industrial Average, DJIA, lost a hefty 391 points, or 1.5%, although up from its lowest point when markets opened in the red.  The S&P 500 index also dropped 35.96 points, or 1.2%, to 2,882.70. Subsequently, the US 2-year treasury yields were falling from 1.63% to 1.58% and the 10-year yield dropping from 1.73% to 1.64% in negative correlation to US stock prices. 

Safe havens tell a story

"US-China tensions, Hong Kong tensions, Brexit brinkmanship. Gold has risen from under USD1,300 at the end of May to over USD1,500 today. US 10-year Treasury yields have fallen nearly 60bp in the same period. The JPY/USD is up 4%. Bitcoin, the alternative safe haven for the brave – or those with limited options – is up 35%. The S&P 500 is still up 4.5% since late May, despite a wobbly month."

Analysts at ANZ bank explained. 

Looking ahead

For the week ahead, things will perhaps get back to good old fashioned economic data with the likes of US Consumer Price Index, (CPI), and a raft of European numbers, that could well underpin the central bank divergence between the European Central Bank and Federal Reserve should European data fall on negative yet again and US CPI hold up. 

"The US data highlight is July CPI, with consensus 0.3%mth, 1.7%yr total, 0.2%mth, 2.1%yr ex-food & energy. This often moves markets even if the Fed insists it exaggerates the pace of inflation," analysts at Westpac argued.

Additional key events stay with the Federal Reserve theme with the minutes and Jackson Hole later in the week:

"Recent escalation in US/China trade talks and the tightening in financial conditions have placed the Fed in a tight spot. With its reaction function closely tied to global "crosscurrents", we expect communication though the Minutes and J. Hole symposium to attempt to clarify the path forward. While Fedspeak should support near-term easing, the market is more than priced for it,"

analysts at TD Securities explained. 

USD/JPY levels

Valeria Bednarik, the Chief Analyst at FXStreet, explained that the technical picture supports the ongoing bearish case:

"The USD/JPY pair is down for a fourth consecutive day. In the 4 hours chart, the pair stabilized well below moving averages, with the 20 SMA maintaining its downward slope at around 105.75 and over 200 pips below the larger moving averages. Technical indicators barely bounced from their daily lows before losing strength upward, supporting another leg lower.  Below 105.00, the next relevant support area, and a possible bearish target is the 104.20/30 price zone, where the pair has relevant monthly highs and lows."