USD/JPY praises PBOC’s RRR cut, trade-positive news amid Japan’s holidays, eyes on China data

USD/JPY stays in the range of 108.60/75 while trading around 108.72 by the start of Thursday’s Asian session. In doing so, the pair keeps small gains amid the recovery in risk sentiments due to the Chinese central bank’s rate cut and increasing optimism surrounding the US-China trade relations. Even so, the US-Middle East tension and holidays in major parts of Asia still limit the market’s reaction ahead of the key data from Beijing.

China’s People's Bank of China (PBOC) announced 50 basis points (bps) into Reserve Ratio Requirement (RRR) cut, effective January 5. With this, big banks will now be required to hold reserves of 12.5% of their assets, contrast to 10.5% for smaller institutions. Earlier in the week, the PBOC announced that financial institutions should stop using the one-year lending rate as its reference rate while start with the Loan Prime Rate as the base rate beginning January 1. Moves like this from China signals the dragon nation’s rush to propel the liquidity at home and the same can be positive for the market and its risk tone due to Beijing’s status as the world’s largest industrial player and the second-largest economy.

Trump and Navarro signal strong US-China trade relations ahead…

The US President Donald Trump’s tweet confirmed the phase-one signing in a ceremony on January 15. The Republican leader also said that he will later head to Beijing to discuss the next phase of the arrangement. Additionally, White House Advisor, Peter Navarro, also crossed wires and said that more “great deals” (with China) are coming this 2020. Although Trump administration has always gone a step farther while cheering success in trade negotiations with China, the mood is backed by the positive sentiment from Beijing as Chinese Vice President is also ready to visit the US on Saturday. The same contributes to the market’s risk tone.

Even so, the market’s closure in Japan and New Zealand seems to restrict the reaction to the latest news ahead of China Caixin Manufacturing PMI data for December. Also contributing to the market’s lack of smiling welcome to 2020 are the political tussle between the US and the Middle East after the Pentagon’s “defensive strikes” into Iraq and Syria.

The data becomes more important after the latest official reading confirms the sustained manufacturing recovery. Forecasts suggest 51.7 figures versus 51.8.

Following that, the US Markit Manufacturing PMI for December will also be watched for direction. The activity gauge is likely to remain unchanged at 52.5.

Technical Analysis

An upward sloping trend line since mid-November, at 108.60, becomes immediate key support while December 19 low nearing 109.20 holds the key to 109.75/80 resistance area.