– USD/JPY has recovered from fresh weekly lows around 103.60 back into the 103.80s.
- Amid broadly soft USD conditions across the market risk now, recent upside might be looked at as nothing more than a dead cat bounce.
- USD/JPY continues to trade within its recent bearish trend channel, implying further losses are likely.
USD/JPY has seen some upside in recent trade, with the pair climbing back into the 103.80s, a move some commentators may see as nothing more than a dead cat bounce from fresh weekly lows set earlier on Wednesday of just above 103.60. The pair currently trades over 30 pips, or 0.3%, lower on the day, as investors/traders continue to exchange their US dollars for yen despite an improvement in the market’s broader appetite for risk.
The rising sea (falling dollar) lifts all ships (currencies, including JPY)
JPY has benefitted today from softer USD conditions, as traders continue to weigh up the latest news on the pandemic, US political/geopolitical and global central banking fronts, with markets seemingly concluding that all three are USD negative;
1) Regarding the pandemic, USD has seen minor strength in wake of recent vaccine updates, but these bouts of strength (seemingly driven by higher US yields at the time) have proven short-lived. Perhaps that is reflective of markets focusing more on the long-term economic impact of a faster global immunisation programme (sooner end to the pandemic, faster recovery in 2021). If that implies stronger global growth relative to US growth in 2021, then vaccine news is actually more likely to end up a USD negative, some participants may argue. Meanwhile, the major economy seeing the worst deterioration in its economic outlook right now due to Covid-19 is the US (New York just announced closure of schools), given that Asia is doing ok and Europe is already in lockdown and seeing Covid-19 numbers stabilise. Another reason not to favour USD.
2) Markets are highly confident that Joe Biden will be President as of 21 January, even though the result has not yet been certified amid the Trump Administrations lawsuits and fraud claims. With the President seemingly more focused on trying to hold onto the Presidency in 2020 which he almost certainly seems to have lost, markets are concerned he might “run amok” in his final weeks and there are already reports pointing to this; last week President Donald Trump was reportedly talked out of authorising a military strike on Iranian nuclear facilities that could have sparked a conflict in the region. Such US political uncertainty might undermine the US dollar’s desirability as a safe haven.
3) The BoE and RBA have already just eased monetary policy, the BoC, BoJ, PBoC and RBNZ are all on hold and, given very clear guidance that more easing is coming in December, markets largely now price in the coming ECB “bazooka”. Meanwhile, no one is quite yet sure what the Fed is going to do in their December meeting; FOMC speakers (including Fed Chair Powell and Vice Chair Clarida) have all signalled increasing concern for the US economy over the coming months give the worsening virus situation. All have reiterated that emergency liquidity and financing facilities, as well as easy policy, are not going anywhere, but clear signals of what further measures might be on the horizon are yet to come. Thus, if the FOMC are to enact further economic supportive measures over the coming months, USD might yet need to see some further downside in order to price this in.
USD/JPY bearish bias still in play
USD/JPY continues to trend to the downside within a bearish trend channel (see the four-hour chart). With little by way of notable levels of support to the downside ahead of the November low at 103.17, a test of this level seems more likely than, say a reversal back higher towards the pair’s 21-day moving average at 104.58. Such a move would require a break to the upside of USD/JPY’s recent trend channel, as well as moving back above resistance in the form of the 16 November low at 104.36.
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