USD/JPY is primed for further losses

USD/JPY continues its prolonged, orderly and slow technical descent as the yen is favored by real interest rates and modest safety-trade. Currency markets are prepared to reward the dollar for an improving global economy. Hopefully, vaccines will end its hold and permit normal economic activity, but that recovery may still be a few months away, FXStreet’s Analyst Joseph Trevisani briefs. 

Key quotes

“Technically, the USD/JPY remains immured in a descending channel that can be stretched back to December 2016, though the much narrower channel from the beginning of July is more relevant for current trading. Support is primarily at 103.30 which marks the bottom on November 6 and the start line for the rally on the 9th. Those were the lowest points since the crash and immediate recovery in March.”

“The accelerating rise in COVID-19 diagnoses in the US, even though there have been similar increases in Europe and to a lesser degree in Japan, has sapped the safety-trade resort to the US dollar. The course of the pandemic in the US and the potential for economic damage has kept the greenback on the general defensive since early in the month. The yen's traditional safe-haven status has added to the dollar's decline.”

“The yen has been favored by the differential in real interest rates, primarily due to the very low inflation in Japan. The yen is strengthened by deflation and the dollar is weakened by inflation to a greater degree than the difference in the base interest rates. Slipping US Treasury yields are also undermining the dollar.”

“Until infection rates decline and the threat to the economy is removed, the dollar and the USD/JPY will be unable to benefit from the historically better US growth.”

“Technically, all indicators point lower. The descending channel is intact and well-defined. Resistance lines beginning at 104.30 are more plentiful and endorsed by far greater price action. The moving averages are all above market levels.”

“Countering the trend lower, or potentially doing so, are two fundamental factors. First, the USD/JPY is approaching the range near 100 yen where the last reversal took place in November and December 2016. The Japanese government will not want to burden any recovery with an expensive yen. Second, the dollar recovery is waiting for the all-clear signal from the US economy.”