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  • USD/JPY pining for a reversal towards the point of control.
  • Bulls step following stock market squeeze and shake out and subsequent bullish correction.
  • Central banks in focus as OECD issued downgraded growth forecasts in relation to the COVID-19 outbreak.

USD/JPY is trading at 108.34 between a low of 108.20 and a high of 108.53 in Tokyo with the safe-haven yen underperforming following an impressive buying spree on Wall Street. USD/JPY ranging between 107.40 and 108.60.

Investors were buying US stocks and the Dow Jones Industrial Average added 1,293 points, or 5.1%, to close at 26,703, a stunning move in what was marking its best point gain in history and its best percentage gain since March 23, 200 – more on that here: Wall Street close: DJIA marks its best point gain in history

Meanwhile, news that the OECD issued downgraded growth forecasts in relation to the COVID-19 outbreak was doing the rounds. Global growth for 2020 was lowered by -0.5% to 2.4% from 2.9%. Chinese growth was revised –0.8% to 4.9% for 2020, recovering to 6.5% (+0.9%) in 2021. In response to the global outbreak, G7 finance ministers and central bankers who are holding a teleconference to discuss their policy response to the economic fallout from the coronavirus. Tomorrow’s G7 call is going to be led by Mnuchin and the Fed chair and there’s going to be a communiqué afterwards.

Global data in focus

Meanwhile, as far as US data went, US February manufacturing ISM came in at  50.1 and was softer than its estimate of 50.5 and down from 50.9 in Jan. Across the Atlantic, Eurozone Feb final Markit manufacturing PMI was firm at 49.3 and close to its flash reading of 49.1 and over the Channel, UK Feb final Markit manufacturing PMI edged lower to 51.7 from its flash reading of 51.9. However, the real impact of the coronavirus will not be seen until next months data, which leads to a prospect that central bankers may wish to wait and see how their individual economies are holding up.

Central banks in focus

The Bank of Japan has very little room to manoeuvre, although its Governor, Haruhiko Kuroda, issued a statement yesterday after an early plunge in share prices, saying the central bank “will closely monitor future developments, and will strive to provide ample liquidity and ensure stability in financial markets through appropriate market operations and asset purchases.”

Today, we will have the first of central bank meetings since the outbreaks with the Reserve Bank of Australia. Westpac expects a -25bp cash rate cut to 0.50% but economists are divided, the Bloomberg survey finding a narrow preference for no change. “Market pricing, however, is around 100% for -25bp. This comes after plunging PMI data from China, an escalating spread of COVID-19 globally, and ahead of an expected FOMC rate cut at their March meeting. This should be enough to nudge a reluctant RBA into action.” And for that matter, will likely path a foundation for other central banks in the eyes of the market at least which makes the RBA a huge event today. 

A return to the point of control on the cards

While stocks may have been rallying, profit-taking and algos would most likely be in play – triggering short-covering volumes and encouraging reversal traders to get on board, brave enough to catch the falling knives of the equity market.

In typical fashion, the yen was on the back foot in its negative correlation to equities and if the bulls can build up a position, on a swing trade basis, there are prospects for a return to higher volume nodes and point of control (POC) of the recent sell-off comes in the 1.1050 area, lining up nicely with a 61.8% golden ratio target. A 50% retracement is located at 109.80.

However, bulls will need to get over the late August rally’s POC which is at a 23.6% Fibo retracement and the session highs of 108.53. In doing so, and holding above 108.50 will add conviction to the upside recovery. On the otherhand, a less contrarian trade would of course favour and encompass the current risk-off themes in the market as follows: USD/JPY: Bounces off 107.50 but still looks bearish