The dollar/yen pair came out of hibernation and renewed its monthly low, reaching 106.37 during the Asian session on Friday. At the same time, Japan is celebrating a few holidays - the country celebrated the Day of the Sea yesterday, and today it is the Day of Health and Sports. The economic calendar is empty, which means the pair is moving in the wake of the US currency, which continues to lose ground.
Let me remind you that the pair has been trading within the 107th figure over the past three weeks, occasionally leaving this price range. Then the pair began to gradually decline to the 106th price level, but with upward pullbacks. The USD/JPY bears needed a strong downward breakout, but conflicting fundamentals prevented sellers from launching such an offensive.
But the downward dynamics of the US currency has recently begun to acquire an avalanche-like character. If the dollar index was around 97 points at the beginning of July, today this indicator has fallen to the March lows, that is, in the area of the 94th figure. The coronavirus continues to "eat up" the greenback positions, although COVID-19 was the main ally of the dollar throughout the spring. But there was no trace of the former excitement, and now the pandemic has turned against the US currency. The number of cases and deaths from the virus continues to grow in the United States, causing justified alarm among investors. Only now the yen, which acts as the main protective asset in the foreign exchange market, has become the beneficiary of the worrying sentiment.
The situation with coronavirus continues to worsen in the United States. The daily growth rate continues to steadily increase. Just last Sunday, around 45,000 new patients were reported in the country. The 60,000 mark was initially broken, and then came the 70,000 mark on Wednesday. Yesterday, around 76,000 infected people were detected in the United States. In other words, there is a negative upward trend, and this fact puts quite a lot of pressure on the greenback. The greatest number of infected is observed in California (there are 421,857 cases to date), second line of the list is New York (409,697 cases), followed by Florida (389,868 cases), followed by Texas (363,615). The state of Florida is of particular concern, namely the city of Miami, which has already been dubbed the "American Wuhan". There are 10,000 (!) new cases of infection registered daily. The city has already tightened quarantine restrictions, but so far the incidence is not declining.
The White House still maintains a passively observant position and does not intend to repeat the spring scenario. But states may tighten quarantine restrictions at the local level, and many of them have already begun similar actions. This fact has already affected the dynamics of the recovery of the labor market: after a 14-week recession, the growth rate of the number of applications for unemployment benefits again showed negative dynamics. Instead of the projected decline to 1.3 million, the indicator rose to 1.416 million. The pullback is relatively small, but the trend itself is important here, especially against the background of the aggravation of the epidemiological situation in the country.
Another fundamental factor exerts indirect pressure on the dollar. The fact is that a new fault line has formed in relations between China and the United States: for the first time in 40 years after the restoration of diplomatic relations between Washington and Beijing, the White House has decided to close the PRC consulate in Houston, Texas. At the same time, US President Donald Trump did not rule out that after this diplomatic mission, others may be closed. As explained in the state department, "Houston" Chinese diplomats were caught in visa fraud and industrial espionage (theft of intellectual property). Beijing promised to respond with measures, although it did not specify which ones.
In general, this situation has become another reminder that relations between the PRC and the United States are going through hard times. The statement of this fact became another reason for strengthening the dollar's sell-off.
At the moment, the downward momentum of USD/JPY is gradually fading away, but the priority still remains on the side of the bears. Only two factors can help the dollar in the foreseeable future: if Congress approves the allocation of additional funds to help the economy; and if the coronavirus loses its grip. Given the ongoing debate between Republicans and Democrats over the new stimulus package, and given the upward trend in COVID-19 incidence, it can be assumed that the yen may increase its pressure in the medium term, directing the USD/JPY price towards the bottom of the 106th figure.
From a technical point of view, the pair is currently testing the support level of 106.50 – this is the lower line of the Bollinger Bands indicator on the daily chart. The price is located under all the lines of the Ichimoku indicator, which formed a strong bearish Parade of lines signal. This shows a clear advantage of the downward movement. From the current positions, we can consider sales to the local price low, which corresponds to the level of 106.05.