USD/JPY sell off held up on short covering, but trade risks stand out

• USD/JPY technical failures on 110 handle give way to a sell-off.
• USD/JPY consolidates as stock move sideways following Trump's address.

USD/JPY is currently trading at  109.75, up from 109.55 and down from a high of 110.05. The business community did not find to much comfort in yesterday's address from Trump and the yen has filled a void as stocks move sideways and Us yields are off their recent highs,  with 10-year yields below 2.700%. Moreover, the futures markets continue to price little chance of any further Fed rate hikes in this cycle, with a 10% chance of a hike in December and a 10% chance of a cut.

Sino/US round 2 talks will be a major risk

At the same time, the headlines do not bode well for US–China round two trade talks next week in Beijing, led by U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin. Topics to be discussed will include intellectual property protection and structural reforms which are bound to be challenging. Trump announced a deadline of 2 March 2019 for finding a deal which will pressure China and as such will weigh on risk sentiment. In yesterday's address, Trump suggested to Congress that it should pass the Reciprocal Tariff Act which is telling as we move down the line of trade talks with China and it just shows that the EU and Japan could also become targets looking forward. 

USD/JPY levels

Meanwhile, from a technical basis, DMI remains negative with the price capped at 110 with price swooping lower within the bullish channel below the 110.56 top. 

"We are currently in no man’s land sitting below the 200 day ma and the October low at 111.26/41, we remain suspicious of the current rally and will elect to sell the rally. The base of the channel at 108.70 guards the 107.75/50 band,"

analysts at Commerzbank argued.