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Japanese Yen on the Back-foot, Technicals Suggest Further Losses Ahead

Yen exchange rates

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- U.S.-China to sign trade deal Wednesday

- Improvement in investor sentiment disadvantages safe-haven Yen

- Large bullish engulfing candle  bodes for further USD/JPY upside

The Japanese Yen is vying with the British Pound for the title of worst-performing major currency amidst a broadband pickup in global investor sentiment that creates the conditions that tends to disadvantage this safe-haven currency.

The Pound-to-Yen exchange rate is quoted at 142.71, slightly down on the previous week's close. However, the Yen-to-Dollar exchange rate is quoted at 109.83, its strongest level since May 2019.

Over the course of the past week the Yen has in fact fallen against all other currencies in the G10, with the lion's share of losses coming against the U.S. Dollar (down 1.30%) and the Swiss franc (down 1%):

Yen relative performance

Above: The Yen's performance over the past week. Imace (C) Pound Sterling Live.

The reason for Yen weakness appears to be the now-scheduled signing of a Phase 1 trade deal between the U.S. and China, to be held at the White House on Wednesday.

News of a signing ceremony signals to markets that the two sides have done enough to 'seal the deal', and will likely set aside any fears that last minute hang ups will scupper an important milestone for markets.

With stocks on the rise, it is usually the Japanese Yen that finds itself the victim, as investors shift out of JPY-based assets to fund 'riskier' global assets that would rise in times of market optimism.

"Expectations of a midweek signing ceremony at the White House on a first phase trade deal provided a lift to market sentiment," says Joe Manimbo, Senior Market Analyst at Western Union. "Reduced geopolitical uncertainty and trade hopes running higher knocked the yen to seven-month lows."

Technical studies of the Dollar-Yen exchange rate suggest further losses in the Japanese currency can be expected over coming days, and potentially weeks.

"The USD/JPY looks very interesting as the new week begins," says Fawad Razaqzada, Technical Analyst at FOREX.com. "It has hit a new high for 2020 despite Friday’s disappointing U.S. jobs report, with the Yen also weakening amid ongoing risk-on sentiment as investors anticipate the signing of the much-touted phase one trade deal between the US and China on Wednesday."

Razaqzada says "for now, price action on the USD/JPY appears rather bullish."

Dollar-Yen chart

"On the weekly (inset), it formed a large bullish engulfing candle last week, with the reversal price action causing rates to peak above a bearish trend line and key short-term resistance at 109.70. Price now needs to hold above this level if the bulls want to take full control of near-term price action. However, a daily close back below 109.70, if seen, would complicate the outlook," says Razaqzada.

Those looking at other Japanese Yen-based pairs should be aware that strength in USD/JPY would likely have a strengthening effect on other currencies against the Yen. While GBP/JPY has not exhibited the same degree of strength of late it nevertheless looks relatively well supported,

For GBP/JPY to extend higher however, the current bout of selling in Sterling, linked to Bank of England expectations, would need to fade and reverse.

We look towards the November 24, 27 and 28 release of PMI data for January to provide crucial evidence of whether or not the UK economy is undergoing a post-election bounce, as businesses respond to the injection of political certainty and the associated Brexit roadmap it provides.

Strong data here would signal to markets that there is no incentive for the Bank of England to cut interest rates, and therefore there is little reason to be negative on Sterling until EU-UK trade negotiations hit turbulent waters.

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