USD/JPY is vulnerable to a full market response to Trump's signing of Hong Kong Human Rights Democracy Act

• USD/JPY has drifted to fresh highs, testing critical resistance confluence area.
• Despite Hing Kong bill legislation and implications of Chinese retaliation, markets conclude that it won't stop trade talks. 
• Full markets will return next week and they are going to highly sensitive to Chinese and US trade negotiations ahead of critical 15th Dec tariff date. 

USD/JPY is flat at the time of writing following a drift to the upside overnight, despite the blatant risks associated with the latest developments in the trade war saga. USD/JPY moved up from a low of just above 109 the figure yesterday to score a high of 109.60 prior to the headlines – when they hit, the pair sank to 109.30, held steady and drifted back to the midpoint of the handle. 

The headlines being referred to here, are of course, with Trump signing the Hong Kong Human Rights Democracy Act which sparked off a series of threats fro the Chinese. It was a move that China had previously warned could be highly detrimental to their tentative relationship, especially with respect to trade negotiations. Yet, the markets have all but feard the worst and instead have taken the dangerous development in their stride, so far. The consensus is that a so-called, "phase-one' deal will still be liked before the next round of tariffs on Chinese imports is due to kick-in on the 15th of December. 

Instead, USD/JPY remained near a six-month high, ranging between 109.25 and 109.55, recovering the ground lost on the news. Indeed, China reiterated its retaliation threat but has not offered details on possible retaliation. China's Foreign Ministry came with the following statements:

• Severely meddles with China’s internal affairs.
• Severely violates international law.
• Opposes US law on Hong Kong.
• US attempts to move in on Chinese affairs are doomed to fail.
• The Act seriously interferes in the internal affairs of China violating international laws and basic principles of foreign relations.
• China will take firm countermeasures if the US continues in this way. 
• US will have to shoulder all consequences if it continues this way. 

Meanwhile, casting minds back, the following are extracts taken from the Global Times report, which delved into the implications for what has become a reality:

Opening paragraph

US senators are encouraging Washington to carry out a "self-damaging mission" in pushing forward a Hong Kong-related bill that may lead to sanctions on China and a review of the trade status of the Hong Kong Special Administrative Region, experts said. They warned that China would come up with equivalent countermeasures if Washington enforces the measure.

Future countermeasures   

• China can carry out countermeasures, such as sanctioning the senators who pushed the bill forward, the National People's Congress Standing Committee passing resolutions as China's blocking statute and providing sufficient political and interest protection to Hong Kong and mainland officials who may be sanctioned, analysts said. 
• Hong Kong-based expert Tang Fei, a member of the Chinese Association of Hong Kong and Macao Studies, believes that the passage of the bill will weaken Hong Kong society's consensus and determination to end the current violence and chaos in the city and give Trump leverage in US trade negotiations, and even strategic competition with China.
• "But at the start, its effect will remain in theory as the US president and government are flexible when implementing it. It doesn't necessarily mean a blacklist will soon be made, and the US president can make adjustments according to 'national interests,'" Tang told the Global Times on Wednesday.
• Passing the bill will surely weigh on the ongoing trade talks between China and the US, as reviewing the special trade status of Hong Kong or revoking the status would also hurt trade ties between China and the US, as much of the trade activities take place through Hong Kong, a global trading hub, another analyst said. 
• "The US Congress has been highly politicized as those politicians only care about their own political goals, ignoring the fundamental interests of their country," Mei Xinyu, a research fellow at the Ministry of Commerce's Chinese Academy of International Trade and Economic Cooperation, told the Global Times on Wednesday. 
• Such a move will also put the US president in an embarrassing situation, as the Trump administration has been seeking a trade war truce with China by coming up with the first-phase agreement, Mei noted. 
• "Creating leverage out of the Hong Kong issue will also affect trade talks," he said.

Trade talks still on, although they are also on thin-ice

Given that the US markets have been closed and traders have been away enjoying their Thanksgiving celebrations in North America, depending on what the weekend brings with respect to subsequent headlines surrounding the matter, we could be in for a further bout of risk-off flows should there be an escalation of retaliatory measures from China. Indeed, we have not seen what US traders and investors think of the matter, yet. Earlier, we have heard from the Global Times analysts who said that, "China firmly launch countermeasures against this wrong move and the US must take responsibility for all the results." 

At this stage, it is purely speculation, but having witnessed as well as considering the past 18-months of talks and subsequent quarrels over trade between the two nations – well, a leopard doesn't change its spots and a dragon will always breathe fire. However, the threats sounded severe, but the New York Times has argued that they also sounded empty.

China Condemns US Over Hong Kong. That Won’t Stop Trade Talks - New York Times 

"China’s reaction was immediate but unspecific. It summoned Terry Branstad, the American ambassador to China, to complain about the Hong Kong legislation, after doing the same thing just three days ago. Hu Xijin, the well-connected editor of the nationalistic Global Times tabloid, said China could retaliate by banning the legislation’s drafters from China and Hong Kong, a move that would be symbolic at best,"

the article read.

Indeed, the article takes on the view of what we have seen in lacklustre risk-off price action. The New York Times wrote:

 "Behind the harsh rhetoric, China has few options for striking back at the United States in a meaningful way. And it has bigger priorities — namely, ending the increasingly punishing trade war between the two countries," the article began.  "On Thursday, Beijing’s main agency on trade remained quiet on the legislation even as other officials railed against it, suggesting that the government remained open to a trade deal and would let the volatile issue of Hong Kong simmer, at least for now," it concluded while citing that “'Beijing will make a lot of noises but they can’t afford to do much,” said Steve Tsang, director of the SOAS China Institute in London, a research center. 'The trade deal is so important to the Chinese that they won’t let anything upset it.'"

The article also pointed out that, at "in its weekly news conference on Thursday, China’s Commerce Ministry — the arm of the Chinese government directly involved in trade talks — did not mention the American legislation," which also leads observers to feel that the Chinese are more worried about their economy and need this trade deal more than what they have previously let on. "The Communist Party governs with undisputed power in China based on a promise of a better life, so a slowdown could present a direct challenge to its rule," the New York Times concluded on the matter. 

However, only time will tell as to whether trade talks will continue in a positive direction next week and there is a feeling that markets are going to be more sensitive to headlines than they have been for some time considering we are in, what Trump said, the "final throws of a trade deal", yet talk is cheap. A deviation of positive sentiment will most certainly put the breaks on risk appetite and the yen has already pushed back to make or break point vs the greenback on a technical basis - indeed, it is ripe for a severe reversal on a switch-up in risk appetite. 

Japanese data dump

Meanwhile, the final business day of the month brought the usual flurry of Japanese data. November Tokyo Consumer Price Index, Oct Unemployment and Oct industrial production. 

November Tokyo Consumer Price Index: Core consumer prices in Tokyo rose 0.6 percent in November from a year earlier, government data showed on Friday. The core consumer price index for Japan’s capital, which includes oil products but excludes fresh food prices, compared with economists' median estimate for a 0.6 percent annual rise.

• Tokyo area November core CPI +0.6 pct YoY - govt (Reuters poll: +0.6 pct)
• Tokyo area Nov overall CPI +0.8 pct YoY - vs 0.4% expected/prior.
• Tokyo area Nov cpi excluding fresh food, energy prices +0.7 pct YoY. 

Oct Unemployment and Oct industrial production:

• Japan Unemployment rate for October: 2.4% (expected 2.4%).
• Job to applicant ratio (October), comes in at 1.57 vs expected 1.56, prior 1.57.
• Japan oct industrial output -4.2% MoM – Japan Oct industrial output was expected -2.0% MoM, vs prior 1.7%.
• Japan manufacturers see Nov output -1.5% MoM (prev forecast: -1.2%).
• Japan manufacturers see Dec output +1.1% MoM.

Japanese data dump, headline CPI: +0.8 PCT YoY (beats 0.4% expected/prior)

USD/JPY levels

Bulls are taking the price to the limits with a test through the 200-day moving average and of the 61.8% Fibonacci retracement of the late April swing highs to the late-summer lows.  "The 200-week moving averages are found nearby at 109.87 and the 2015-2019 downtrend at 110.66. This latter level is tough resistance and is expected to hold the topside. While this resistance area caps, near term attention, will remain on the recent low at 107.89. Failure here will further alleviate upside pressure and trigger losses to the 106.48 October low," analysts at Commerzbank explained.