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  • USD/JPY is consolidating in a toss-up between risk-on and off themes.
  • Nation leaders are looking for a get back to work plan. 
  • Disastrous economic conditions can be expected to present themselves in the weeks and months ahead.

USD/JPY is trading a touch higher on the day in the latter half of the 107 handle between 107.16 and 108.08 as the dollar remains on the front foot following a bout of risk-off midweek in terms of the bull market of the last three weeks.

It was a poor day for global equities yesterday, selling off due to various data releases for March and a slew of poor performances in corporate earnings which hit the screens. Today, in terms of data at least, was no different. Jobless claims in the US over the past four weeks has run up to as much as 22 million. Add that to the global COVID cases that have climbed above 2 million in the last 24 hours, it makes for frightening reading. The US is now on track for a 17% unemployment rate in April, which would be a new post-WWII high.

Get back to work

Meanwhile, however, markets are forward-looking and the prospects of a peak in COVID-19 cases and the curve flattening. Equities have been buoyed by US President Donald Trump’s determination to get the population back to work and now Germany is following in lockstep after announcing, albeit cautiously, a planned exit strategy starting from May 3rd.

With strict hygiene measures, Germany has planned to allow secondary schools, hairdressers and smaller shops to open while Bars, restaurants, and hotels will remain closed until further notice. Also, large group gatherings will remain forbidden until at least September.

The concept of trading-off self-isolation for returning to normal to help the economy has been pushed by Trump’s cabinet including, his economic adviser Larry Kudlow, who has stated, “public health includes economic health.” 

However, what is concerning for any nation is the risk of the second wave of contagion, or god forbid, even a mutation as the virus struggles desperately to survive herd immunity. It should be noted that worldwide cases passed 1 million on April 2, and with the latest figures hitting 2 million, we have thus doubled over the last 13 days, whereas it took 8 days previously to double from 500,000. So pockets of spikes here and there could be shortlived, hence a slow and strategic opening up of business activity is most prudent, if not just simply unavoidable; populations may even fear to return to work altogether so long as there are government handouts for those entitled to them. 

As for forecasts for the US economy, analysts at Standard Charted Bank said, “we expect a substantial fall in economic activity in Q2, followed by a recovery in H2, leading to a 2.8% contraction in GDP in 2020 – we see substantial downside risks if the rise in unemployment is sustained and/or a second cycle of coronavirus forces another shutdown, with GDP potentially contracting by 10% this year.”

USD or JPY?

As for the toss-up between the yen or USD for their safe haven qualities, it’s a very fine line. While the Japanese economy in real trouble (5% contraction in GDP 2020 on the cads) with little more the Bank of Japan can do to stimulate the economy, other than do what it has always done, the JPY can still attract a bid given its stable current account surplus. However, the USD is likely to remain in favour should volatility spike again at the next market or financial system shock.

“Disastrous economic conditions which can be expected to present themselves in the weeks and months ahead and have had very little time to process the various tentacles of the crisis. As such, we expect to see further bouts of USD strength over the coming quarter,”

analysts at Rabobank argued. 

USD/JPY levels