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  • USD/JPY is sliding as USD starts to give up the ghost.
  • Financial markets are stabilising, and weakness are showing through the cracks in the greenback.

Despite a better risk tone overnight, USD/JPY is testing the critical support of the 107 figure while the US dollar continues to bleed out is stabilising financial markets that are preparing for tapering and a slow return of business activity. There are hopes that the COVID-19 is peaking around the world.

Overnight, USD/JPY fell from 107.70 to 107.20, tracking the broad US$ trend rather than following risk appetite. At the time of writing, USD/JPY is trading at 106.96 the low and dropped from 107.21 in Asia. US stocks closed higher and both the Nikkei and ASX 200 Index has started off on the front foot. However, there is an underbelly of COVID-19 contagion risk and there are still prospects of a very hard landing subsequent of the shutdowns around the world’s economies, supporting gold to the fresh seven-year highs and the yen stronger across the board. 

Overnight, the International Monetary Fund issued its latest World Economic Outlook, entitled “The Great Lockdown: Worst Economic Downturn Since the Great Depression”. The IMF projects a 2020 contraction in world growth of -3%, with US -5.9%, Euro Area -7.5%, UK -6.5%, Australia -6.7%, and China +1.2%.

However, there was some optimism fulled on Wall Street when the Federal Reserve’s Bullard and Evans discussed its rescue policies, saying that a V-shaped recovery was still possible given that pre-COVID-19 fundamentals were good. Moreover, Reuters reported that ten states were coordinating regional plans to lift ‘stay-at-home’ orders and allow businesses to re-open. 

In the same vein, White House economic adviser Larry Kudlow said, “the country is ready to go back to work.” Also, today, Trump dropped a number of determined comments as well after the Wall Street close about getting back to work, seeing a light a the end of the tunnel. More on that here: US President Trump: We can see the rays of light, we see that tunnel and light at the end

Both US yields sinking and stimulus weigh in on USD

However, Bullard also said that the US lost income of USD25bn per day during the COVID lockdown. The stimulus is a factor that could continue to cast a dark shadow o the US dollar as it gets printed into infinity. With such pressures, the US 2-year treasury yields fell from 0.25% to 0.22%, while 10-year yields fell from 0.77% to 0.73%, closing at 0.75%, also weighing on the US dollar. 

USD/JPY levels