USDJPY Pending Short with US-China Trade Wars now Official

2018-07-06 09:00:00 Justin McQueen

USDJPY Trading Strategy: Short at 111.10, target 109.50, stop loss 111.80

Key risks to the strategy is an easing of the US-China trade spat.

Trade Wars Have Officially Begun

Investors continue to remain wary over the current trade war environment. The US has imposed $34bln worth of tariffs on Chinese goods from today, with an additional $16bln to be implemented at a later stage. Investors are now bracing themselves for the impact of actual implementation of tariffs as well as the potential next stage going forward. The Trump administration has threatened to implement more tariffs on Chinese imports worth $200bln if China goes through with tariffs. Given that China has suggested that they will defend their own interests and carry out reciprocal tariffs, an escalation in trade tensions is likely and thus calls for a weaker USDJPY.

Background on Trade Wars

USDJPY Technical Overview

The pair has continued to reject the 111.10 level which marks the 38.2% Fibonacci Retracement of the 98.97-118.61 rise, which in turn represents an ideal entry point. This is also just shy of key resistance around 111.20, while the descending trendline from the 2015, 2016 and 2017 peak would be where our stop loss lies, situated at 111.80. A break and close below the 20DMA at 110.35 would allow for a run in on our first target at 109.50, while our longer-term target is at 108.80, which coincides with the 50% Fibonacci Retracement.

Trade Strategy Risk

The key risk to the trade is if trade war tensions begin to ease with the implementation of tariffs potentially bringing both the US and China back to the negotiating table in order to try and reach an agreement, subsequently avoiding an implementation of additional sanctions.

USDJPY PRICE CHART: DAILY TIME FRAME (June 2016- July 2018)

Chart by IG

Speculative Positioning Indicate Modest USD Upside

A driver of USDJPY gains has been the building of long positions as reported by the CFTC, which amount to $3.88bln. While USD longs are currently at the highest since May 2017, which in turn suggests that only a modest upside in the USD can be seen from current levels. USDJPY longs face risk of a potential short squeeze as US-Japanese bond yields tighten, signalling a JPY positive view.