USD/JPY: Some upside seen in Tokyo ahead of BoJ - FX to be a theme?

  • USD/JPY has perked up a touch in the Tokyo open, with the pair moving to the 109.40s from an early Asian low of 109.31. 
  • Risk-off sentiment lingers following a sea of red in European and US markets with the Sino/US trade dispute at the heart of risk.

Following a series of poor Chinese data results this year, so far, and citing US / Chinese trade wars, Brexit and the Chinese slowing economy as the main culprits, IMF Chair Christine Lagarde cut global growth forecast for 2019 to 3.5 percent from 3.7 percent. Speaking at the World Economic Forum in Davos, Switzerland, she said that high level of economic risks are accelerating around the globe.

Meanwhile, today's markets were also concerned due to the reports that Trump turned down preparatory trade talks with Beijing ahead of a critical round of trade talks next week. The US officials were citing a lack of progress on forced technology transfers and structural reforms to China's economy. The headlines were subsequently refuted by Kudlow, but the mix of downbeat sentiment has exposed the downside in markets. 

The Dow shed 301.87 points, 1.22% to 24,404.48, with the S&P 500 losing 1.42%, 37.81% closing at 2,632.90. The Nasdaq was the biggest loser falling 1.91%, 136.87 points to 7,020.36. Weakness in oil also prices also weighed on sentiment. WTI fell 2.9% to USD52.3/bbl and gold rose 0.2% to USD1283.5/oz on safe-haven demand.

BOJ coming up

For the day ahead, the main focus will be on The Bank of Japan policy first meeting of the year that concludes today. There is no fixed time for the statement release bu the last updated quarterly forecasts and the economic report concluded just after 2pm Syd/11am Sing/HK. FX will likely be a subject of interest considering the doom and gloom sentiment that tends to support the yen, which the BoJ would be wary of. 

Analysts at Westpac Banking Corporation argued that despite likely downgrades to forecasts of both inflation and growth, there have been no hints of any change to the basic policy settings of targeting the 10 year JGB yield around 0%, JPY80trn annual JGB purchases (no matter the reality of much slower purchases), -0.1% on the short term policy rate and an intention to maintain “current extremely low” interest rates “for an extended period of time.” We should see the usual dissents from Kataoka and Harada."

USD/JPY levels

  • Support levels: 109.05 108.65 108.30            
  • Resistance levels: 109.40 109.75 110.00 

Meanwhile, from a techncial standpoint, Valeria Bednarik, Chief Analyst at FXStreet, explained that the short-term picture skews the risk to the downside:

"In the 4 hours chart, technical indicators entered bearish ground, maintaining their strong downward slopes. The pair is still holding above a key Fibonacci support at 109.05, the 61.8% retracement of the latest daily slump, also above a bearish 100 SMA but also below a bearish 200 SMA. Below the mentioned 109.05 level, the next relevant support is 108.30, the 50% retracement of the same decline that once lost, will only fuel bears' determination."

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