USD/JPY holding in the face of dollar weakness, risk-on denting the yen

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  • USD/JPY struggles to find direction, despite the weakening of the greenback.
  • Equities remain firm as bulls keep the engine ticking over. 

USD/JPY is trading at 107.61 and has travelled within a narrow range of between 107.37 and 107.85, directionless in a phase of consolidation between the 106 and 108 big figures. 

The pair started out the week on the back foot as the USD took a hit, extending its downside to lose the 98 handle in the DXY. The dollar index has traded between 98.32 and 97.82 the low. The dollar is susceptible to risk-on flows stemming from a perceived V-shaped post-COVID-19 lockdown recovery. To put this into context, USD net longs have moved lower breaking a nine-week trend which reflects the softer tone of the USD in the spot market – a function of increased risk appetite.

US President Donald Trump’s China news conference failed to appease the uber hawks and subsequently gave the green light to FX to sell the greenback. On the other hand, this was also a favourable environment for stocks opening this week, likely weighing on the yen. 

At this juncture, with a fear of missing out mentality on Wall Street, the benchmarks remain bullish. Equities in Asia were also performing well, with the Hang Seng and Shanghai Composite both up strongly. However, in view of the headwinds concerning the risks of the second wave of COVID-19,  while improved risk appetite could squeeze further gains for global equities and continue to weigh on the greenback, we are yet to really see the full extent of the lockdown damages in hard data.

Bulls and Bears, a balancing act for USD/JPY

Long equities is a play on the global economic recovery with a view that there will be no further waves of the virus, a vaccine will be developed shortly, businesses will bounce back and will be creating millions of jobs and society will be back to normal, all in due course. 

The short side is expecting a protracted recession on a global scale. when considering the array of bearish inputs that themselves could result in a recession, let alone a combination of them all, the most bearish of macro investors are expecting something far worse. While nothing is certain, what markets can rely on is the fractious US/China relations are to remain so for the foreseeable future and it may not take many more words of wars to spark something catastrophic for markets to contend with. the sellers are also mindful of that. 

There are arguments on both sides of this pair given the risk profile of geopolitical and global economic conditions which likely leaves the outlook neutral for the cross at this juncture. However, a market shock will likely see demand reinstalled for the debt denominated US dollar – for now, however, its business as usual. 

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