USD/JPY. Yen takes a break in anticipation of a new wave of panic

By | January 29, 2020

Relevance up to 09:00 UTC–8

The Japanese currency traditionally reflects the general mood of the foreign exchange market. As a defensive asset, the yen is keenly responsive to the external fundamental background, reflecting an increase or decrease in demand for safe haven instruments. In mid-January, the currency significantly fell – including paired with the dollar. As soon as the US-Iran conflict moved to the economic plane (and the threat of the third world, respectively, passed), the price of USD/JPY grew sharply, reaching 110.30. The pessimistic results of the January meeting of the Bank of Japan only fueled interest in long positions in the pair, and it is likely that the price would have settled in the 111th figure at the end of this month, if not for one “but”. An unexpected outbreak of pneumonia in China returned interest in defensive assets, after which the yen returned to service, rapidly increasing momentum. In other words, the Japanese currency now (however, as always) acts as a weather vane of anti-risk sentiment in the foreign exchange market: if the Japanese rises in price, then there is still panic among traders.


That is why yesterday’s dynamics of the USD/JPY pair aroused some interest. The price has been falling nearly without pulling back for almost a week and a half (to be more precise, since January 21), losing more than 150 points. But yesterday, the downward momentum faded, and buyers were able to develop a slight correction. Comparing this price dynamics with the news flow regarding the spread of coronavirus, we can conclude that the bearish prospects of USD/JPY are based only on the nervousness of market participants. And as soon as traders hear a more or less encouraging informational occasion, the bears’ grip instantly wanes.

All this suggests that the downward trend is uncertain and unsteady – as soon as the situation with the incidence is stabilized, the pair will sharply turn up. Anti-risk sentiment is the main driving force of USD/JPY – there are no other arguments for revaluing the yen. The Bank of Japan continues to take an extremely cautious and pessimistic position, and key macroeconomic reports of Japan have a weak effect on the dynamics of the pair.

But back to the “chronicle of the coronavirus.” Yesterday’s correction was due to two factors that have similar roots. First, Hong Kong developed a vaccine against the ill-fated coronavirus. True, the details of this fact are no longer so optimistic – according to scientists, they will test the created drug in animals for several months and only after that they will conduct clinical trials in humans. In total, this process will require at least a year. Nevertheless, amid all sorts of apocalyptic scenarios, this informational occasion carried positive features, so the market reacted accordingly. In addition, similar news came from Australia yesterday. There they managed to create a laboratory copy of the Wuhan Coronavirus. According to experts, this will help to quickly create the necessary vaccine. In addition, a laboratory copy of the virus can help diagnose coronavirus in infected people in the early stages – even before symptoms appear.


These news drivers helped reduce the degree of heat in the financial markets. The yen also reacted accordingly, slowing its growth paired with the US currency. However, the subsequent flow of information offset the “germs of optimism” – the number of infected people exceeded the 6,000th mark, and the death toll reached 132 people. More than 400 patients are in critical condition. Obviously, in the coming days, these indicators, alas, will only increase, thereby supporting interest in defensivee tools. Since the new coronavirus has an incubation period (within 10-12 days), all the observed statistics today are an epidemiological picture within the previous 10-day period, that is, when quarantine has not yet been entered. In other words, the active spread of the virus through human contacts has already taken place, and the symptoms are only now appearing. Therefore, over the next one and a half weeks, experts predict a peak in incidence, after which the increase will go to a gradual decline. At least, many experts adhere to this scenario.

Such prospects allow the bears of the USD/JPY pair to regain a few dozen points. For example, when the number of infected people exceeds the 10,000th mark (this will happen in the coming days), the yen will again be in demand in the wake of anti-risk sentiment. But if the situation develops within the framework of the scenario stated above, then the pair is unlikely to overcome the support level of 108.10 (the lower line of the Bollinger Bands, which coincides with the lower boundary of the Kumo cloud on the daily chart). If the panic disappears ahead of schedule, then the pair will return to the area of the 110th figure in a matter of days, especially if today’s Fed meeting will be held at least in a neutral manner.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

Performed by Irina Manzenko,
Analytical expert
InstaForex Group © 2007-2020

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