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  • USD/JPY has switched direction as the dollar soars to a key retracement level.
  • News of a coronavirus vaccine plays into the hands of risk-assets. 

USD/JPY is currently trading at 105.39 having travelled between a low of 103.18 and a high of 105.64 as the US dollar resurges on prospects of a COVID-19 vaccine.

Pfizer PFE said on Monday its experimental vaccine was more than 90% effective in preventing COVID-19, based on initial data from a large study.

The news, potentially a major victory in the fight against a pandemic that has killed over 1 million people and roiled the world economy, sparked a sell-off in safe-haven global bond markets.

Despite the Joe Biden victory, the dollar has also benefitted on the belief that there will not be so much stimulus needed if a vaccine is administered throughout the US population.

Therefore, the dollar has rallied the yen has reverted to its typical safe-haven status. 

USD/JPY typically has the highest correlation to US yields. The yield on the US 10-year note rose 13.9bps to 95.8bps.

Bond yields also benefited from some clarity with last week’s US presidential election which can play into the hands of yen bears also.  

Investors are truly optimistic and there’s not a whole lot of sellers, with a lot of investment coming back off from the sidelines, as seen through the rally on Wall Street with the S&P 500 soaring to print a fresh all-time high. 

DXY bearish prospects 

Meanwhile, the US dollar, however, could be in for a downside extension according to the following analysis which would rhyme with a market getting too far ahead of itself on the knee-jerk. 

In yesterdays analysis:

the DXY was forecasted to rally to at least a 38.2% Fibonacci level which has transpired in today’s volatility, albeit a lot more sharply so than expected:

There is now a discount in the market to be short of dollars.

While the vaccine news is welcome, the playing field has not necessarily charged, certainly not for the immediate future.

US new covid cases continue to rise with 105,142 cases vs yesterday’s 93,811. 

The picture in Europe is just as concerning, with record numbers over the past few days being reported in several countries.

The vaccine news does not change the near-term fact that the global economy faces a challenging recovery ahead.

Renewed European lockdowns could shave off roughly 2% off GDP in the fourth quarter, according to some forecasts.

Under the President Select Joe Biden, there are greater risks of further and even stricter restrictions in the US on the horizon when he moves into the White House.

Lockdowns will put a considerable brake on activity.

The dollar will be pressured on all that fiscal stimulus that will be then be needed and the yen will continue to play out a haven role, but benefitting from inflows instead of outflows.  

USD/JPY levels