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  • USD/JPY bull step in to defend the critical psychological support area of the 105 zone.
  • The US dollar is trying to pick itself off the ground, with markets technically overextended against the mighty greenback.

USD/JPY is trying to ground in the 105 area in what has been a negative day so far for the pair, falling from a high of 105.68 to a low of 104.95.

Equities have edged lower and safe havens are on the bid which is supporting an appetite of the Japanese yen.

Fundamentally, second waves of the coronavirus and tomorrow’s Federal Reserve interest rate decision event are dominating sentiment in the market, while at the same time, an impasse in US stimulus negotiations and mixed earnings reports have sent investors to the sidelines. 

The US dollar, while technically yearning for a meaningful correction, is going to struggle as US politics heads towards a fiscal cliff at time where some 30 million Americans are out of work while states are tightening lockdown restrictions again. 

The DXY is trying to base just north of 93.40 while the JXY is showing signs of a major breakout having jumped onto the 95 handle this week at the same time gold and cryptocurrencies have rallied. 

The moves have translated into serious extensions on their daily charts which would usually be followed by consolidation, profit taking or some form of a deeper correction. 

Ignoring the market fluctuations in March, USD/JPY has this week traded at the lowest level since August last year. The move is almost wholly due to USD weakness,

analysts at Rabobank argued. 

Moreover, the analysts explained that in the month to date the JPY is the third worst-performing currency after the USD and the CAD (which tends to get dragged around by USD moves). This is consistent with a market more enamoured with carry trades then safe haven. 

Additionally, despite the prospects of a prolonged US recession, (if the US sneezes the rest of the world catches a cold), the USD will be favoured on any further breakdown in market confidence and there is no escaping that reality, due to its dominance in the global payments system and there have been small efforts to break this down to date. 

That said, analysts at Rabobank argue, insofar that the JPY is sensitive to geopolitical news in the Asian region, there is good fundamental reason for the JPY to retain a firm bias vs. the USD given the increase in China-related tensions. 

While many analysts have concluded that a Biden victory in the US Presidential election may bring a reduction in US/China tensions, a change in the US electorate’s expectations from China is set to ensure that the relationship between the two superpowers remains headline news. In addition, China’s relationship with several other nations has been worsening and the JPY is likely to remain sensitive to this.  

USD/JPY levels