USD/JPY hit a six-month high overnight but gains are kept under wraps after Trump signed off on the HK bill
Buyers kept up the good momentum on the week and moved away from the 200-day MA (blue line) to the upside and even hit a six-month high near 109.50 overnight.
However, any further extension is limited for now after Trump signed off on the HK bill and that prompted some fighting words on retaliation by Beijing today.
Essentially, the trade for USD/JPY can now be broken down into two parts. The first part is the more immediate concern and that is whether or not the HK bill has the potential to derail the "Phase One" trade deal in the coming days/weeks.
So far, the market reaction has been modest and suggests that traders are still holding on to hope that a deal is still in the offing; and that both sides can keep this issue independent from any trade negotiations.
While I believe that this certainly has an impact on trade and more structural issues in negotiations between both countries, there may be some leeway still in letting a "Phase One" deal be completed considering how insignificant it is in the first place.
As mentioned before, it is but a symbolic gesture to put in place a trade ceasefire. It is by no means a major trade compromise or a meaningful deal.
That brings us to the second part for USD/JPY. If a "Phase One" deal does go ahead, is it going to add further gains to the pair or will markets focus on the fact that the deal is basically just a symbolic gesture with no significant give and take?
The consideration here is that traders may react in a 'buy the rumour, sell the fact' manner but it all depends on the focus, timing and presentation of the deal.
In any case, for USD/JPY now the risk for buyers is if price starts to fall back towards the 109.00 handle and back below the 200-day MA @ 108.93. That will undo all the positive momentum on the week and essentially see things reset once again.
As for sellers, the key will be trying to stop a firm move above 109.50 with further resistance seen closer towards 109.90-00. There is also some minor resistance around 109.70 but if risk sentiment reverses, buyers will easily feel comfortable to drive price higher again.
