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Demand Jumps for JPY & Gold On Trade Fears, Canceled North Korea Summit

Demand Jumps for JPY & Gold On Trade Fears, Canceled North Korea Summit

2018-05-24 17:30:00
Tyler Yell, CMT, Currency Strategist
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USD/JPY Rate Forecast Talking Points:

  • The ONE Thing: demand for JPY is spiking in the derivatives market. Whether you look at implied volatility over the coming week or risk-reversals, option premium ratios, JPY demand is in vogue.
  • The clear backdrop for the US Dollar premium is fading as the Fed fails to back the four hikes in 2018 view in latest minutes, which may weigh on USD/JPY.
  • USD/JPY Price Forecast:Identifying resistance on the pull-back since Monday favors the 9-day midpoint at 110.20. Broader support is found at 61.8% of recent two-month advance at 107.21.
  • Not familiar with trade wars and their history?We got you covered

Derivatives are showing demand is growing for JPY upside protection. Traders appear to be turning toward Jeremy Wagner’s view that USD/JPY may soon be working itself lower toward the 108/107 zone amid speculation that a new round of Trump-induced tariff’s, this time on autos are resurrecting trade war fears on the same day that the meeting between Trump and Kim was scrubbed from the calendar.

Pay Up To Protect

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Data source: Bloomberg

The chart above shows the drop in risk/reversals, a ratio of premium paid for upside vs. downside USD/JPY protection. The falling blue line aligns with lower spot price as traders are paying a premium to protect against further JPY strength over the coming month.

In addition to JPY strength, Gold has rebounded to back above $1,300/oz. The closing level of $1,290 will likely be seen as strong support given the multiple failed attempts to close lower. Additionally, if an environment of JPY demand is aligned with a weak USD, Gold may find favor among traders.

Kim-Trump Summit Canceled, Havens in Demand

June 12 will no longer be the day of global hope that is was once set to be after President Trump canceled the summit with North Korea’s Kim Jung Un. Trump commented on the “tremendous anger and open hostility” after multiple references were made by the Administration, most notably US VP Mike Pence about at Libya model.

One would be hard-pressed to find fault in the unfavorable comparison as the US ended up backing a coup on the Libyan government that led to the eventual ousting of the late Libyan revolutionary Muammar Gadaffi.

Despite Trump saying that North Korea’s Kim could stay in power, Trump sent a letter to the white house taunting North Korea’s supposed nuclear power by saying, “You talk about your nuclear capabilities, but ours are so massive and powerful that I pray to God they will never havebe used.”

Institutions Are Shying Away From Their Bullish US Dollar Views

After the FOMC shed light on their near-term hawkish view, but dovish medium-term view there was a bid in US Treasuries showing that rate four hikes in 2018 is not a done deal.

Four Fed rate hikes in 2018 were seen as a key catalyst of US Dollar strength that emerged in April, but as the calendar approaches June, the question is surfacing as to whether the key factors of US Dollar strength has run its course.

A key fundamental driver has been the UST 2Yr yield that recently nearly tagged a decade-high. Currently, the UST 2yr yield is roughly 80bps above the effective Fed Funds rate begs the question if there is much upside left? If there is not, traders may see it first in a lower USD/JPY.

See what we see when looking at the Japanese Yen. Check out our new Q2 Yen Forecast here.

USDJPY Chart: Price Breaks ST Support, Now Looks To Fibo Levels

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Chart Source: Pro Real Time with IG UK Price Feed. Created by Tyler Yell, CMT

Technically Speaking on USD/JPY:

Resistance: 110.17/111.39 (9-day midpoint, May high)

Spot: 109.28

Support: 108.81/107.22 (38.2%-61.8% retracement of March-May range)

The correction has arrived, and traders will likely see a strengthening JPY as nearly a two-month uptrend takes a breather on negative global macroeconomic developments cloud the horizon. Bullish USD/JPY traders in the long-term should maintain their view above 107.

Short-term resistance comes from the 9-period midpoint at 110.20. A hold below this level on a closing basis shows us that previous supporting fundamental factors for the uptrend that took price from 104.63 to 111.39 are continuing to contract.

New to Ichimoku? Click here for a free guide if you’d like to learn more

More For Your Trading:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q2 have a section for each major currency, and we also offer an excess of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our popular and free IG Client Sentiment Indicator.

Forex Trading Resources

DailyFX offers a surplus of helpful trading tools, indicators, and resources to help traders. For those looking for trading ideas, our IG Client Sentiment shows the positioning of retail traders with actual live trades and positions.

Our trading guides bring our DailyFX Quarterly Forecasts and our Top Trading Opportunities, and our real-time news feedhas intra-day interactions from the DailyFX team. And if you’re looking for real-time analysis, our DailyFX Webinars offer numerous sessions each week in which you can see how and why we’re looking at what we’re looking at.

If you’re looking for educational information, our New to FX guide is there to help new(er) traders while our Traits of Successful Traders research is built to help sharpen the skill set by focusing on risk and trade management.

---Written by Tyler Yell, CMT

Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as t1rading educational resources. Read more of Tyler’s Technical reports via his bio page.

Communicate with Tyler and have your shout below by posting in the comments area. Feel free to include your market views as well.

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