USD/JPY Forecast: Hong Kong Elections Fuel Risk On Appetite

An Unlikely Catalyst

The relationship between Hong Kong and the U.S. dollar is tenuous at best and yet the one is leading to a rally in the other. The results of Hong Kong’s elections resulted in an overwhelming win for pro-democracy candidates. The results are a warning shot to the establishment (China) that its policies will not be tolerated as they are on the mainland. While the news does little to assure Hong Kong’s ultimate autonomy it is having a positive effect on markets around the world. What it means for investors is stability (at least the removal of one uncertainty) within the region and that is fuel risk-on appetite.

What this means for the dollar is a shift from risk-off assets like the Japanese Yen in favor of riskier bets on global growth. The USD/JPY is moving up in early Monday action because of it and the charts point to solid gains in the weeks ahead. Today’s candle is a solid move up from support at the short-term moving average and the precursor to a potentially strong buy-signal. The move is already confirmed by a bullish crossover in stochastic that is in line with the prevailing trend. A move higher may find resistance at the 109.50 level but, once that is broken, a move up to 110.00 or 110.50 is expected.

What could possibly move this pair above resistance? How about a raft of economic data that is largely expected to confirm fundamental strength within the U.S. economy. Wednesday, due to the Thanksgiving holiday, there are a dozen major economic releases for the U.S. These include but are not limited to Personal Income and Spending, Consumer Level Inflation, Chicago PMI, and the Fed’s Beige Book. Individually, no single data point is expected to be robust, as a whole the package is expected to reveal stable if not modestly accelerating economic expansion despite the impact of the trade war.

Despite the outlook, there is some risk to this trade. Weak data, weak inflation, or negative trade news could put this pair into a reversal. The weekly chart helps highlight this risk as it shows an asset wound up within a trading range and very near the midpoint of that range. The good news, for traders, is that a confirmed of support/resistance at this level is likely going to lead the pair up/down by 350 pips or more.