USD/JPY rallies to test the vicinity of 109 level, critical for market sentiment

USD/JPY has recovered from a 78.6% Fibonacci retracement of the 16th March impulse as global markets extend their comebacks from the virus sell-offs. 

At the time of writing, the pair is some 0.26% higher on the session with some moderation in the US data and general de-risking weighing on what may be perceived as an overvalued yen.  

Despite seeing a fresh three-month low in the defensive USD which is continuing to slide as global risk sentiment improves, USD/JPY has managed a bid as US equities grind higher. The DXY fell to a 97.19 low from the 97.63 highs on the day while G10-FX extend their recoveries. 

One of the positive inputs, besides economies getting back to work, relaxing social distancing measures and seeking to open up their borders (such as in the EU), trade war risks have lost their impact. 

This week's report that Chinese state-owned firms bought US soybean cargoes on Monday despite previous headlines of a halt has lifted bullish spirits. US Senator Grassley has also been insisting that the US-China trade deal was on track.

G10 currencies overbought?

"We are also closely monitoring the JPY, where the longs built are at risk of unwinding following a sudden push above 108.10/30 vs USD. With most G10 currencies now "overbought" on the daily RSI," analysts at TD Securities noted. 

Meanwhile, all eyes are turning to the globe's economic data as well as central bankers. We are hearing positive rhetoric from the bank's governors and Stephen S. Poloz today the latest to strike an optimistic tone on a way out of the coronavirus lockdowns.

However, the key FX move is this yen falling away across the board. It is a clear barometer that the equity market was right, for now. FX is likely to find its pre-COVID high volume nodes and consolidate, waiting to see how this story will now play out at the central banks. 

V-shaped recovery in data underpinning Wall Street, weighing on the yen

As for data, we have had some clear positive surprises, especially out of China and the US, the two most powerful economies in the world and the hardest hit nations by the virus. 

Firstly the ADP private payrolls series showed far fewer net job losses than anticipated. Markets were looking for a 9 million monthly decline in employment yet we only got 2.76 million in May, suggesting hiring has been more aggressive in the reopening phase. Another surprising outcome was in the housing data. 

This morning’s mortgage approvals data showed the seventh consecutive increase in applications for home purchases. We are seeing V-shaped recoveries in the US data and China which is helping to underpin bullish sentiment in equities and therefore should weigh most heavily on the yen at this juncture.  

USD/JPY levels