When a currency becomes a kind of indicator of the intensity of trade tensions in the United States and China, and the news about the relationship between the two largest economies in the world does not leave the front pages of the media, interest in it is heated to the limit. The escalation of the trade conflict between Washington and Beijing has lowered USD/JPY quotes to its lowest level since January. The US raised tariffs from 10% to 25% for $200 billion-worth of imports from China and also threatened that it would impose duties on all deliveries from China to the US market within a month. In such a situation, the correction of world stock indices and the yield of US Treasury bonds looks logical, as well as the high interest in the Japanese yen.
According to BofA Merrill Lynch, a large-scale trade war will lead to the S&P 500's 10% peak and possibly a recession of the world economy. Nevertheless, the bank believes in good. De-escalation of the conflict will allow the US stock market to stabilize and add about 5% to its current values. Given the high correlation between the US and Japanese yen stock indices, it can be assumed that the fate of the latter will depend on further dialogue between Beijing and Washington.
Dynamics of USD/JPY and the Dow Jones
Due to favorable financial conditions, a strong economy, low borrowing costs by historical standards, and the market reaction to Donald Trump's statements, I personally doubt that the S&P 500 correction will be deep. If US actions did not fall into the abyss in response to the news over the failure of China-US talks in Washington, calming down because of Steve Mnuchin's conciliatory words about the constructive nature of the dialogue, Liu He's comments about "pretty good negotiations", then surely they will continue to be more sensitive to verbal interventions. The owner of the White House will have the opportunity to rein in the "bears" on stock indexes in the event of a pullback. For this, it is enough to say something good to China.
However, uncertainty creates favorable conditions for safe-haven assets. Beijing has about three weeks until goods that fall under the 25% tariff will move from Asia to America, and about a month until the White House imposes duties on all imports. Will it change its own laws to please the United States? Chinese media claim that China will not eat bitter fruit, but they have previously argued that no one would agree to negotiate at gunpoint. The situation is extremely difficult. According to Societe Generale, at current rates, the loss of US GDP will be 0.25 pp for 2-3 years, China will lose twice as much, and the world economy will lose 0.15 pp. In any case, the uncertainty will continue to maintain interest in selling USD/JPY.
Technically, if the bears in the analyzed pair succeed in consolidating below the level of 109.65, the risks of selling the target by 88.6% in the "Shark" pattern will increase. It corresponds to the mark of 108. As long as the quotes are below 110.8, the sellers are in control of the situation.
The material has been provided by InstaForex Company - www.instaforex.com