USD/JPY struggles to maintain form above 110 the figure, lacking market's conviction

• USD/JPY is struggling to hold in the 110 handle nor the market's conviction. 
• USD/JPY has room tot he top-side, but limited by exporter's offers and technical levels. 
• The US/Sino trade deal will be the next major catalyst, depending on the details of the agreement.

USD/JPY is currently trading at 110.03 having travelled from a high of 110.21 to a low of 109.88 where demand took the pair back above 110 the figure to 110.11 in early New York. 
The yen has been undermined by the ongoing improvement in global investor risk sentiment. However, at the time of writing, USD/JPY is pressured again as we move through the US session and is technically ripe for a test back below 110 the figure.

Looking around, however, US stocks are edging higher with the DJIA and S&P 500 marking fresh upside records in recent trade (typically, this should be bearish for the yen). Regardless, the 10-year Treasury Yields are lower and the US dollar index is on the backfoot below the 21-hour moving average at the time of writing.  

A bearish fundamental case for USD/JPY

When we consider, that the US and China are about to sign a phase-one trade deal, the logical outcome would point to higher stocks and a lower yen. However, the price in the markets is giving out mixed messages signalling that they are now moving into a phase of distribution which could ultimately see a sell-off in the benchmarks and weigh on USD/JPY. Ultimately, the market's attention will fixate on the details of the eventual deal and should it just be seen as a cease-fire, a sell the fact scenario could play out and weigh heavily on USD/JPY – (On the other hand, If the deal involves a larger rollback of tariffs it would increase downside risks for the yen).

Additionally, USD/JPY has entered an area of strong resistance, not only from a technical point of view but psychologically. Japanese exporters will seek to cover their exposure to the US dollar at these levels, selling the greenback to buy yen above 110 in forward and derivative contracts. Corporates do not speculate on the price, but budget costings based on historical prices – 110 is slightly above the mid-point of the past twelve month's range of 104.50-114.60 so will be a likely level of interest. However, it is not until March where Japanese exporters typically start buying yen at the end of their financial year. 

TD Securities is bearish and calls resistance at 110.67

Analysts at TD Securities have pitched a slightly more complex rationale for the same outlook, taking into account Portfolios outflows and 10-year rate spreads:

"We note that the USD/JPY's beta to equities has remained benign. Without the corresponding move in 10-year rate spreads however, a move higher in spot FX is likely to be fleeting. We do not see an imminent catalyst to unnerve 10yr USTs from its recent range."

As for Portfolios outflows,  particularly in fixed income - the analysts argued that they have appreciably slowed towards the end of 2019. "This followed a rather extensive asset re-allocation last year. Because of this, we would expect these flows to be muted into Japan's fiscal year-end."

In conclusion, the analysts said:

"Our short-term HFFV and positioning dashboard points to USDJPY moderately rich and positioning small JPY short. While not at an extreme, it does suggest that conviction levels might begin to waver, particularly as the RSI has neared overbought territory. 110.67 should mark notable resistance."

USD/JPY levels

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