Forming positions in the USD/JPY depending on the results of the November FOMC meeting
The growth of optimism about the successful resolution of the trade dispute between the United States and China, coupled with strong statistics on the US labor market, allowed the USD/JPY bulls to return to attacking the resistance at 113.3. The yen is under pressure due to improved global geopolitical background, expansion of the differential in bond yields and divergence in economic growth.
Donald Trump’s ambitious statements about a “long and good conversation” with Xi Jinping, Chinese officials’ readiness to cooperate with the States and remove barriers to liberalize the domestic market improve investor sentiment. The meeting of the two presidents at the G20 summit in Buenos Aires in late November is an important milestone in the trade war. Everyone expects a breakthrough, which will allow the world economy to breathe easy. As a result, the Chinese yuan and the Shanghai Composite begin to feel the ground under their feet, and US indices lick the wounds inflicted by October. The global risk appetite is improving, which has a negative effect on the safe haven assets.
The growth of wages in the United States to 3.1% y / y, the maximum mark in almost a decade amid impressive employment growth and the minimum unemployment since 1969, confirm the rationality of continuing the federal funds rate increase cycle. At the same time, Haruhiko Kuroda argues that no tightening of the monetary policy of the Bank of Japan should be expected due to the increase in sales tax. The rates will be low for a long time. Divergence in monetary policy contributes to the expansion of the differential in the yield of US and Japanese bonds and leads to an increase in the USD/JPY.
At the same time, over the past two months, rates on 10-year treasury bonds increased by 30 bp, and the cost of hedging - by 50 bp As a result, the return on investment in treasuries for Japanese investors for the first time in many years has fallen below the yields of securities issued in the Land of the Rising Sun. Theoretically, this should reduce the interest in US bonds and the effectiveness of such a driver as different vectors of the monetary policy of the Fed and the Bank of Japan.
Dynamics of US bond yields (including hedging) and Japan 
Source: Bloomberg.
In my opinion, investors' hopes for the meeting of Donald Trump and Xi Jinping are too high. Washington wants too much from Beijing to rely on quick problem solving. Markets are too careless regarding the Italian political crisis. Rome, it seems, is not going to be led by the EU, which is fraught with new sales of the republic’s debt obligations and an increase in demand for safe haven currencies. The BoJ is not in a position to expand monetary stimulus. Rather, it will sit and wait until inflation moves to the target. These factors make the growth potential of the USD/JPY limited.
In the short term, the fate of the pair will depend on the results of the November FOMC meeting. If the Fed shows itself as a hawk, the dollar may rise to ¥ 114-114.5. In contrast, dovish rhetoric of the central bank will allow the bears to reanimate the idea of testing the support at ¥ 111.5.