Tuesday, November 5, 2019

US indices extend record highs; will the yen weaken again?

  • Dollar
  • Gold
  • Yen
  • Euro
  • Pound

Market recap: US-China trade optimism continues to drive global equities

US equities continued to rally on Monday, thanks to growing optimism that a US-China trade pact will be confirmed later this month. The DJIA gained 0.42%, the S&P 500 moved upwards 0.37% and the Nasdaq advanced 0.56%, once again reaching record high levels. The Dollar Index rose 0.05%.

Meanwhile, demand for safe haven assets fell, with gold dropping 0.20% lower and the yen weakening 0.09% against the dollar. US Treasuries yields gained, as two-year yields rose 3bps to 1.58% and 10-year yields surged 7bps to 1.77%.

In Asia, the Nikkei climbed 1.17% on Tuesday morning as the Tokyo Stock Exchange reopened after it was closed on Monday for a public holiday. The Hang Seng Index and Straits Times Index tracked Wall Street, starting Tuesday’s trading session 0.20% higher.

Investors will likely be focused on the US Non-Manufacturing Purchasing Managers’ Index (PMI) from the Institute for Supply Management (ISM), which is released later today at 7pm (GMT +4).


Today’s analysis: Will the BoJ’s September meeting minutes influence the yen?

The Bank of Japan’s (BoJ) September monetary policy meeting minutes are set to be released tomorrow, November 6th at 3.50am (GMT +4). The minutes will likely support the BoJ’s October decision and will hint at its monetary policy stance for the future.

The BoJ announced in October’s meeting its decision to keep its monetary policy on hold, leaving its short-term policy rate at -0.1% and 10-year bond-yield target around 0%. But the highlight of last month’s meeting was the change in tone regarding its forward guidance. The central bank signalled that it would keep short-term and long-term interest rates at their present levels or lower to mitigate the loss of momentum towards a 2% inflation rate. It also revised forecasts to show slower growth and lower inflation in the coming years.

The change in tone is most likely a tool employed by the central bank to manage the yen’s appreciation against other currencies (as Japan’s economy is heavily affected by exports, a stronger currency will reduce demand for Japanese goods). Also, as the Fed has just signalled it may be putting a pause on monetary policy changes in the near-term after announcing a rate cut in its October meeting, BoJ officials are less pressured to use monetary policy to manage its currency.

We expect September’s minutes to reiterate that the central bank is willing to take additional easing measures if there is greater risk of losing momentum towards its inflation target. But this is likely already priced into the market and the yen should remain little changed. The yen will probably be affected by geopolitical risk instead.

As the US and China look likely to sign a trade pact agreement in November, the yen could weaken as investors take on more risk (as the currency is considered a safe haven asset). But we do believe the market is too optimistic regarding the trade pact, as it is only a partial deal and is unlikely to satisfy both the US and China’s requirements.

In the short term, we expect the yen to be little changed on the release of September’s minutes, with USD/JPY ranging between 108.50 and 108.832. In the medium term, expect the yen to continue to retreat as the two superpowers get closer to an initial trade pact, likely pushing USD/JPY past 109.00’s level to trend upwards. If the US-China trade dispute escalates however, expect the yen to sharply strengthen against the dollar.

Bulls continue to apply pressure on USD/JPY as US and China edge closer to a trade pact (H4)

The Stochastic RSI indicates that the Dollar Yen may possibly be overbought, likely due to renewed trade war optimism. Expect the bulls to continue to apply upward pressure as we approach mid—November. The yen is likely to break 109.000’s level if the headlines point to easing tensions between the two superpowers. But if tensions escalate, expect the bears to take advantage of safe haven demand and drive the yen towards the 107.925 resistance level.