USD/JPY: Volatility higher and dollar follows suit, testing bear's commitments

USD/JPY is trading on the bid, but way off its highs for the day as bulls test the US dollar bear's commitments as volatility picks up again and US benchmarks hit the skids. At the time of writing, USD/JPY is trading at 107.38 between 107.87 and 106.92, +0.16% on the day as risk tones still favour the greenback despite shocking US economic data. 

US Data released shown this Wednesday leaves a very dark shadow of the US economy with the NY Fed Manufacturing Index collapsing to -78.2 and US monthly retail sales falling 8.7% in March as compared to a fall of 8% expected. More on that here:

• US Retail Sales: The biggest question is when the employment will be restarted

• US Industrial Production: The decline was larger than expected – BMO

The data echoes warnings earlier this week from the Internation Monetary Fund which issued its latest World Economic Outlook, entitled “The Great Lockdown: Worst Economic Downturn Since the Great Depression”. It projects a 2020 contraction in world growth of -3%, with US -5.9%, Euro Area -7.5%, UK -6.5%, Australia -6.7%, and China +1.2%.

The US dollar had suffered a number of weeks sliding from the mid-March highs as some stability in money markets as a consequence of central bank and government measures shoring-up liquidity in the dollar. However, what is compelling is that USD net longs continued to edge higher in last week's data despite the currency coming under pressure in the spot market – thus, its safe-haven qualities seem as though they are here to stay, so long as there are uncertainties and volatility in the markets pertaining to a degree of threat of COVID-9 to the world economy.

We have seen a jump in the DXY today with the index travelling from a low of 98.82 to a high of 99.98, despite the poor US economic data. Additionally,  fresh data from the BOJ highlights that Japanese investors have been very strong buyers of foreign debt in the month of February, especially US T-bills which likely underpins the US dollar for time to come just as the Japanese and world economy heads into recession. 

US workers not convinced now is the time to return to work

Moreover, while there had been some conviction in US President's eagerness to get the US population back to work, in lock-step with the Chinese, markets are taking a moment to think hard about the consequences of such prospects. Indeed, businesses executives are instead urging the president to do more testing if the workforces are to be convinced. 

At the same time, the CDC has reported a spike in new deaths of 2,330 to 24,582 – yesterday, the death toll stood at 22,252. With the elections this year, Trump will not be sure of himself that forcing a workforce of voters and putting their lives at risk would be such a positive thing for his campaign. It's a catch-22 trade-off for the president – economy / or US lives first  – at this juncture, he is losing either side of the spread. 

USD/JPY levels

As for levels, bulls have taken USD/JPY off a support structure and tested a high volume node and resistance structure through 107.50./80. If 107.20 hods (support structure) then the 200-DMA at 108.30 will be a key target which guards a 61.8% Fibonacci retracement just above it, located in the 108.40s making for a strong level os resistance between the two, with a confluence of a prior support/resistance zone. However, "a slide back below 106.27, the 50% retracement, is required to alleviate immediate upside pressure for focus to revert back to 104.46, the August low, and the 101.80/100.70 area," analysts at Commerzbank argued.

"We are neutral to negative below 111.88/112.23 February high and 2017-2020 down channel, which we look to hold the topside."