USD/JPY calms following vaccine fuelled rollercoaster, bearish trajectory back in play
- USD/JPY trades flat within a tight 104.50-104.60 ranges in recent trade, having calmed following a bout of vaccine-induced volatility earlier.
- USD/JPY eyes a continuation of its recent, gradual downtrend towards 104.00.
USD/JPY has barely moved over the past four-five hours, trading within a tight 105.50-105.60 and sitting flat on the day. USD/JPY traders are seemingly exhausted from the rollercoaster move seen earlier in the day on Monday, when the pair spiked higher from 104.60 to above 105.10 on the latest vaccine update from Moderna, before fully reversing the move by the US equity cash open at 14:30GMT.
USD/JPY focused on the pandemic
Monday’s reaction to the latest positive vaccine update (this time from Moderna, whose vaccine showed an impressive 94.5% efficacy rating and can also be stored at fridge temperatures for up to 30 days) says it all regarding what fundamental themes USD/JPY cares about.
The pair saw a 50-pip reversal in a matter of hours on the vaccine news but hardly moved during Monday’s Asia session following much stronger than expected Japanese Q3 GDP data overnight, which saw the economy grow at a rate of 5.0% QoQ against expectations for a growth rate of 4.4%. Granted, this data is now seen as old news, with markets more focused on how the global economy will evolve into the end of the year and in 2021.
Similarly, the pair hardly moved on a softer than expected US NY Fed Manufacturing Index reading for November, or in recent trade amid comments from FOMC Vice Chairman Clarida. Clarida noted that the Fed is happy with its current policy setting, hinting that he thinks current QE purchases (of $80B per month) are sufficient. He said he is not concerned about the current level of the US 10-year yield (which is currently at just over 0.90%), which could arguably open for the door for a further rise in US yields that could be bullish USD/JPY.
So then, USD/JPY continues to be driven primarily by the pandemic. It seems as though the battle going on right now is between optimism regarding vaccines versus pessimism regarding the worsening state of the outbreak, particularly in the US.
More positive vaccine news seems likely prior to the end of the month (perhaps from AstraZeneca/Oxford University), but the Covid-19 situation looks likely to continue to worsen in the US, and the country is set to continue going back into lockdown, state by state.
In terms of the latest news on the US outbreak; following a number of other states issuing stay-at-home/shelter-in-place advisories over the weekend, California Governor Newsom just ordered most of the state back into the most restrictive lockdown tier, which will be effective from Tuesday.
USD/JPY eyes continuation of recent downtrend towards 104.00
Since 11 November 2020, USD/JPY has fallen gradually declined a total of around 100 pips within a downwards trend channel that has taken it below its 50- and 21-day moving averages or DMAs (which reside at 105.16 and 104.71 respectively).
Today’s kneejerk move higher that took the cross from 104.60 to over 105.10 and briefly breaking out of the downwards trend channel appears to have been a fakeout, thus the pair’s bearish bias appears to be back in play.
Over the last few hours, 105.50 has proven solid support, but given how long USD/JPY has been hovering only just above this area, a break seems likely soon, which would bring the Monday Asia session low in the 104.30s into play. A break of this level would open the door for a push towards 104.00. Significant support sits just above this psychological level in the form of the 21 September 2020 and 29 October 2020 lows.
Alternatively, if the bulls can regain composure, another upside break of the recent downtrend could be on the cards, which would probably need to coincide with a break back above the 21DMA at 104.71. This would open up the door for a test of Monday’s 105.14 high, which fell just short of the pair’s 50DMA at 105.16.
Just above that 50DMA resides a much more significant area of resistance; a downtrend from linking the 1 July 2020, 28 August 2020, 7, 8 and 9 October 2020 highs, as well as the highs set earlier in the month, comes into play around the 105.20 mark. A break above this would be significant and potentially indicate a medium-term shift in direction.
USD/JPY daily chart
USD/JPY hourly chart
