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USD/JPY traders weigh a massive cocktail of mostly toxic risks

  • USD/JPY is caught between a number of macro and geopolitical fundamentals. 
  • US stock markets and S&P 500 continues to impress to the 200-DMA. 
  • Risks in Hong Kong, trade wars and COVID-19 remain compelling. 

Uncertainty is playing out and USD/JPY is in focus. Markets are caught between prospects of the global economy opening-up and the downside risks of second waves of COVID-19, trade wars and the long term effects of a capital flight from Hong Kong. 

At the time of writing, USD/JPY is trading between a low of 107.36 and a high of 107.9, currently on the back foot as the US benchmarks struggle to maintain a bullish conviction for the session. The S&P 500 has traded around the 200-day moving average for the past two sessions having penetrated a critical 61.8% Fibonacci retracement. It would appear that the speculators are buying into the media-fuelled hopes of a post-COVID-10 pandemic recovery. 

S&P 500 above 3000, 61.8% Fibonacci retracement and meets the 200-DMA

It’s long been seen that the US stock market can continue to trade higher despite the macro. What is astonishing this time around is that even though approximately 35 million people are unemployed in the US and demand is nowhere to be seen, stocks have continued to grind higher and beyond a technical psychologically important level where 3000 meets the 61.8% Fibonacci retracement.

An important thing to consider is that not all investors have the foresight of a macro hedge fund manager for whom might well be positioning for a period of deflation, or worst-case scenario, an outright depression.

The US stock market is a wealth-building tool optimized for the patient and there will be many now feeling that they have missed out on bargain prices, where otherwise had been in the sidelines and scared out of the markets, selling everything that they owned. 

The fear of missing out

So, what we could be seeing here is a classic case of the fear of missing out. For investors willing to hold stocks for the long haul, they can buy into the S&P 500 at a much better price today, even at above 2800, than they could have done earlier this year at 3400, for instance.

In turn, encouraged by the positive news out there surrounding progress towards a COVID-19 vaccine and prospects of global consumption picking up, the safe-haven bid in the dollar has started to unwind, gold has drooped and stocks have accelerated. 

USD/JPY will be one to monitor at this juncture. There is a great deal at stake across a number of macro fundamentals. From deflation to inflation arguments, COVID-19 second waves (resulting in and out of lockdown, potentially).

For the immediate future, fortunately, the daily new cases in the US and most first hit developed nations have primarily been trending downward for weeks. The global economy is reopening. But the economic damage was real and will be long-lasting. Only time will tell.  

 The Hong Kong Dollar, the next black swan?

However, the Hong Kong and trade war risks with a general demand in the shortfall of USD offshore in an indebted globalised world should be closely monitored. An outright exodus from Hong Kong could be the next Black Swan event to roil markets and fuel the bid for USD. 

USD/JPY levels


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