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  • USD/JPY on the backfoot, sharply down as dollar crumbles ahead of the Fed.
  • Little rhyme nor reason to the yen’s sudden appreciation, but had been technically undervalued. 

USD/JPY is down to test a critical support level, losing a further 0.66% on the day, so far, having dropped from a high of 108.54 to a low of 107.62, extending the 5th June decline. 

The US dollar is trying to come up for air but it keeps being washed out by additional waves of supply. At the time of writing, the DXY is underwater by 0.42% and printing a fresh low in a sell-off which commenced 26th May from 99.77.

Yesterday, markets officially said goodbye to the longest US cycle in history as the National Bureau of Economic Research declared that the US has been in a recession since February, thus ending a 128-month expansion. Global equities have been a mix though, especially when noting the divergence between Wall Street and its counterparts in Asia.

The US markets are buoyed by the Fed announcing that their “Main Street” program, which will open soon to eligible lenders, would be available to more businesses. Expectations are of a dovish outcome at their meeting this week which should also underpin robust stock prices. 

Little rhyme nor reason to the yen’s sudden rally

However, there is little rhyme nor reason to the yen’s sudden appreciation, although it should be noted that speculative capital is bound to be way below regular levels.

Given Japan’s surplus status which attracts safe-haven investment, bouts of flow could be exaggerated through the yen. In these times, however, the same would apply to any other currency for that matter, just look at the Aussie. 

Geopolitics coming back to the fore

Meanwhile, one antagonist of late has been with the breakdown of relations between the North and South of Korea. The North has cited that South Korean authorities have “connived” to carry out “hostile acts” against the country. 

There had been news that North Korea will shut down a liaison office that it shares with South Korea and sever other official communication including a leaders’ hotline. The KCNA also reported that “this measure is the first step of the determination to completely shut down all contact means with South Korea and get rid of unnecessary things.” 

This could partly help to explain why the yen has outperformed the rest of the G10s vs the US dollar. Additionally, trade wars are never far from the market’s mind which would usually serve to support both the yen and USD. It would appear, however, that this is a dollar story at this juncture, coupled with positioning ahead of the Fed this week and an overly stretched bearish position in the yen.

USD/JPY levels

 

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