Yen, US Dollar May Rise as Market Mood Sours Again

TALKING POINTS – YEN, US DOLLAR, CHINA, TRADE WAR, SHUTDOWN, ISM

• Risk appetite swells on China RRR cut, US jobs data, dovish Fed-speak
• Testy US-China talks may fuel trade war fears, sour market mood anew
• US government shutdown, soft services ISM data amplify risk-off threat

A quiet offering on the economic data docket is likely to put sentiment trends in focus for foreign exchange markets in European trading hours. The mood is relatively upbeat at the start of the week, echoing Friday’s rosy session. Investors cheered as China cut its banks’ reserve requirement ratio (RRR), December’s US jobs data dwarfed forecasts and comments from Fed Chair Jerome Powell took a decidedly dovish turn.

Bellwether S&P 500 futures are pointing decidedly higher, hinting at more of the same ahead. That seems to be most obviously negative for the perennially anti-risk Japanese Yen, while the pro-cyclical Australian, Canadian and New Zealand Dollars rise alongside other so-called “risky” assets. The markets’ disposition may yet darken however as worries about the US/China trade war re-emerge.

TESTY US, CHINA TRADE TALKS MAY SOUR MARKET MOOD

A delegation from Washington DC is in Beijing, hoping to build on the ceasefire agreed by presidents Donald Trump and Xi Jinping at the G20 summit in Argentina and establish a foundation for rapprochement. That may prove elusive however considering the group’s leader – US deputy trade representative Jeffrey Gerrish – seems to share the fiery disposition of his boss, USTR Robert Lighthizer.

That seems to set the stage for a tense gathering over the course of Monday and Tuesday. If incoming soundbites from its sidelines appear to confirm as much, worries about a prolonged conflict’s negative implications for global growth may sour sentiment anew. An added fiscal headwind courtesy of a still ongoing US government shutdown surely doesn’t help as well.

SOFT SERVICES ISM SURVEY MAY TARNISH UPBEAT JOBS DATA

Finally, there is US economic data to contend with. December’s service-sector ISM survey is on tap, with expectations pointing to a slowdown in the pace of activity growth. A disappointment echoing the abysmal manufacturing ISM component published last week might remind traders that jobs data is often a lagging indicator, warning that the current state of the business cycle is in fact more worrying.

US DOLLAR MAY RISE IF RISK APPETITE EVAPORATES

If a risk-off turn does materialize, the Yen is likely to return to the offensive while commodity bloc currencies bear the brunt of selling pressure. The US Dollar may also rise as its liquidity haven appeal returns to the forefront. Indeed, this seems to be why the Greenback has proven to be remarkably resilient despite fading Fed rate hike bets in recent months.

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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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