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  • Coronavirus remains the major theme in markets, yet the optimists are supporting risk-on flows. 
  • USD/JPY bulls holding the fort on key support structure, looking to 111 handle and a gap to close.

USD/JPY idles at the top of the day’s range in holiday thin markets, oscillating around 109.93 having travelled from a low of 109.71 to a high of 109.96. Market’s are taking the coronavirus threats in their stride and US stocks are a favourite pick by investors which is keeping the yen weak and supporting the greenback.

We are seeing a far more sanguine approach to the coronavirus than first anticipated and looking to the latest FX positioning data, the selling interest in the yen keeps prevailing as net positioning was at -14% of open interest as of 11 February. Moreover, the mounting signs of US economic resilience, despite a set back in Friday’s data, keep on feeding the USD bullish sentiment leading to a build-up of the support structure in USD/JPY on a 23.6% Fibonacci retracement area (109.70) of the Feb. range – 108.30-110.13.

The effort to contain the new coronavirus to weigh on global growth 

The extensive efforts to contain the new coronavirus have will have caused economic growth in China to slow abruptly and it will be having repercussions around the world. However, it is too early to say what the extent of the damage will be on the Chinese economy let alone the global economy. For now, at least, there is optimistic positioning in the markets, banking on Chinese stimulus although there is still a great deal of uncertainty about what will happen over the coming weeks on the course taken by an infectious disease that is still poorly understood.  For that matter, the yen is unlikely to materially shift to the downside until a clearer and positive assumption relating to the contagion risks to the wider global economy can be made.

Yesterday, there was news that Moody’s had revised global growth forecasts down by two-tenths of a percentage point and revised downward GDP growth forecasts for China to 5.2% in 2020. China’s Xi Jinping recently said that China would still meet its economic targets this year despite the outbreak – “the most important of these is the Party’s longstanding target to double 2010 GDP by 2020. To do that, the government will need to publish annual growth this year of at least 5.7%,” Niel Shearing, Chief Economist at Capital Economics argued. 

In the latest update from the World Health Organization, (WHO), it states that the latest data provided by China appear to show a decline in the number of new coronavirus infections,  but express that it’s too early to tell if this trend will continue.”This trend must be interpreted very cautiously, trends can change as new populations are affected,” WHO chief Tedros Adhanom Ghebreyesus told reporters on today. 

Meanwhile, when US stock markets return this week, the yen will likely be subject to the direction for which investors will be most balanced and if we continue to see all-time record highs, likely relating to President Donald Trump’s presumed election victory this year, then then the yen can stay offered for the time being. 

USD/JPY levels

There is a short-term bullish technical outlook for USD/JPY as the pair balances between a 38.2% and 23.6% Fibonacci area, albeit within a rising bearish wedge formation where trendline resistance around 110.20/40 could prove to be a near-term obstacle en route to 111 the figure, (a prior gap on the charts).

A deeper retracement to 109 the figure should the bulls fail to at 109.40 opens the 61.8% potential support before a full-blown breakout below the rising wedge’s support with 108.05 as a 38.2% Fibo of the wedges range to date as a key initial downside target ahead of a 50% mean reversion located at 107.36.