Trade Idea Of The Day

What: 

As the new week kicks off sentiment is driving trading. Investors are digesting two key events. Firstly, President Trump’s announcement from last week, that a 25% tariff will be placed on US steel imports and that a 10% tariff will be placed on aluminium imports. 

The news prompted fears of retaliation by Europe, Canada and China and concerns of a trade war, concerns which were further aggravated by Trump tweeting that a trade war was “good”. 

More recently, the other key event was the Italian elections over the weekend. In these elections Italians expressed their discontent with the ruling centre-left and the EU project, by voting in record numbers for anti-establishment and Eurosceptic parties. 

The centre right bloc, including Silvio Berlusconi’s Forza Italia won the most votes, whilst anti-establishment 5 Star Movement won the title of largest single party. 

However, no party or bloc won sufficient votes to rule with a majority, meaning Italy faces political instability and potentially a hung parliament. 

There are fears that the 5 Star Movement could join forces with the far right Lega Nord, which could result in a serious threat to the euro project and Italy’s membership to the European Union. Whilst the reality is that this is an unlikely event, fears are still being played out in the markets.  

The combing of these two risk events, Trump and Italy has sent the Volatility Index (VIX) higher today. The VIX, often referred to as a fear gauge for the market, it is trading over 6% higher in the morning session at 20.43. 

When fear is present in the market, we often see this played out in the USD/JPY, investors tend to move into the Japanese Yen, thanks to its safe haven status.  

USD/JPY fell heavily on the announcement of Trump’s trade tariff’s from 107.00 to current levels of 105.60 where it is seen consolidating. 

Should risk appetite pick up in the afternoon with a rebound in European equity markets and a solid reading from US non-ISM manufacturing data, then we could see a pickup in USD/JPY. 

USD/JPY levels to watch: 

A meaningful move above 105.70 could see the pair extend gains towards 106.00 handle before heading towards resistance in the region of 106.50. 

On the downside a convincing move below 105.40 could see the pair target 105.00. A close below 105.20 would be considered a strong bearish signal.