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US-China Trade Talks Risk Breaking Down, USD/JPY Currency Options Signal Fears

US-China Trade Talks Risk Breaking Down, USD/JPY Currency Options Signal Fears

2019-11-21 09:10:00
Justin McQueen, Analyst
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US-China Trade War Analysis & News

  • Hong Kong Bill to Weigh on US-China Trade Talks
  • Option Markets Highlighting Concerns Over Possible Breakdown in Trade Talks

Hong Kong Bill to Weigh on US-China Trade Talks

Overnight, the House of Representatives passed the Hong Kong Human Rights and Democracy Act by 417-1 with the bill now going to President Trump to either sign into law or veto. The bill would entail an annual review of the special treatment that Hong Kong receives under US law and would require the US to impose sanctions on Chinese and Hong Kong officials who are deemed responsible for human rights violations. Consequently, equity markets dropped overnight with safe-haven assets benefitting, given that this looks increasingly likely that this will weigh on US-China trade talks, raising the risk of a potential breakdown in trade talks yet again. Alongside this, Reuters reported that the US-China phase one agreement could be pushed into next year and thus prolonging the economic uncertainty.

Option Markets Highlighting Concerns Over Possible Breakdown in Trade Talks

In light of the US passing the Hong Kong bill, option markets have been showing increased demand for Japanese Yen calls over puts, prompting risk reversals on both the 1-week and 1-month to fall to 4-week lows. In turn, this highlights that USD/JPY may be set for a larger pullback on the back of a deteriorating risk environment amid the potential failure in US-China trade talks. In the short term however, with vanilla option expiries littered around 108.00-108.75, volatility in the currency may be somewhat constrained.

Option expiries

USD/JPY: 108.00 (850mln), 108.15-20 (722mln), 108.25-35 (1.7bln), 108.40-50 (2.7bln), 108.65-75 (1.3bln)

US-China Trade Talks Risk Breaking Down, USD/JPY Currency Options Signal Fears

USDJPY Price Chart: Daily Time Frame (Mar 2019 – Nov 2019)

US-China Trade Talks Risk Breaking Down, USD/JPY Currency Options Signal Fears

--- Written by Justin McQueen, Market Analyst

To contact Justin, email him at Justin.mcqueen@ig.com

Follow Justin on Twitter @JMcQueenFX

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