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USD/JPY: Popping in Tokyo, but risk prevail and limit upside

  • USD/JPY has popped higher in the Tokyo open.
  • USD/JPY is currently trading at 108.32, up from an overnight low of 108.14 and hitting a Tokyo high of 108.34, so far, at the time of writing.  

USD/JPY is attempting the upside following a sell-off overnight and at the start of the week and the day prior, falling from the 108.50s as investors scrambled to the fae havens.

"Yesterday's Chinese trade data provided a reality check to those who have been peddling a more upbeat trade story on the back of US-China talks," analysts at ING Bank explained. "Current tariffs are already doing considerable damage, and merely not adding to that burden will not deliver a turnaround."

Today, Indonesian trade data will shed some light on whether China's trade problems are being transmitted elsewhere in the region, but what is clear is that there needs to be a further economic stimulus, and until then, risk is elevated due to the potential contagion throughout the global economy. The size of the stimulus will be contingent on just how bad the situation in China gets and that is what the analysts at ING explain as being the nub of this question:

"What appears highly evident by the run of recent data is that the Chinese economy is already being hurt by these tariffs. We may not see the full effect of this reflected in official GDP figures...the industrial profits numbers tell a different, more negative, and probably more accurate story of what is going on."

The week ahead

Meanwhile, for the week ahead, the week ahead is jam-packed of event risks. We not only have a number of Fed speakers but the Brexit vote is coming up today which is bound to offer volatility. We also have US retail sales, industrial production, new home sales, housing starts, factory orders and regional PMI data for January this week.

USD/JPY levels

  • Support levels: 107.90 107.55 107.20      
  • Resistance levels: 108.35 108.65 109.05

Valeria Bednarik, Chief Analyst at FXStreet explained that the pair is neutral-to-bearish short-term, stuck around the 50% retracement of its December/January decline, while developing below firmly bearish 100 and 200 SMA, with the shortest around 150 pips above the current level:

"The Momentum indicator aims marginally lower around its mid-line, while the RSI also turned modestly lower, now at around 46. The key support is the 38.2% retracement of the mentioned decline at 107.55, with a break below it required to confirm a steeper decline ahead."

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