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USDJPY resilience explained

February 10, 2020 10:30 PM

Following a strong performance by U.S. equities overnight a calmer tone evident in markets this morning. Any nerves that were around on the re-open yesterday eased as news filtered through during the day that manufacturing at a number of Chinese plants had come back online and supported by another round of easing measures by Chinese authorities.

Also helping, reports this morning that show the coronavirus infection rate has continued to slow. Researchers at the Imperial College in London estimate the mortality rate from coronavirus at 1%, both of which suggest the virus is less severe than originally feared.

When news of coronavirus first started to capture the market's attention, we wrote on January 21st here that short USDJPY would offer traders a downside opportunity if equities were to wobble. At the time  USDJPY was trading at 109.97.

Specifically, we said, “Providing USDJPY remains below resistance at 110.30 and was then to break below 109.70 (formerly resistance now support) the risks are for a decline towards the recent 107.65 low.”

As it turned out equities and USDJPY did proceed to fall, however, the fall in USDJPY was less than expected. There now appears to be a very strong explanation behind USDJPY’s resilience during that episode.

That latest Ministry of Finance data reveals that Japanese trust accounts bought a record amount of foreign bonds during January, in the order of U.S. $19 billion (+¥2tn). The portfolio FX rebalancing flows (selling JPY) that accompany foreign bond purchases are likely a key reason why USDJPY and cross-JPY performed much better than anticipated.  

With USDJPY’s round trip almost completed, it’s time to update our view of USDJPY.

The recovery from the 108.30 low has taken USDJPY back to within eyesight of the key resistance ahead of the 110.30 high (from the 2015, 125.85 high).  

Should USDJPY break and close above 110.30/40 it would be initial confirmation a rally towards 112.50 is underway. It would also be a catalyst for traders to consider opening longs in USDJPY, a trade that is in keeping with the stronger U.S. dollar view outlined in our article yesterday “February flight for USD.

Source Tradingview. The figures stated areas of the 11th of February 2020. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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