Protective instruments recorded its strongest growth yesterday: the franc strengthened to five-year highs, while gold renewed record highs. The yen also did not stand aside: the Japanese currency reached the 105th figure when paired with the dollar. The pair has not been in this price area since March, when the coronavirus factor played on the side of the safe haven currencies.
We observe a natural price correction during the Asian session on Tuesday. There are no good reasons for the dollar's recovery: it seems that market participants have massively recorded profits based on the results of a fairly volatile Monday. This fact made it possible for the dollar bulls to partially win back their positions, although their behavior looks very modest so far.
The USD/JPY bears were able to reach the bottom of the 105th figure yesterday, but were unable to break the lower line of the Bollinger Bands indicator on the weekly chart to develop the downward momentum, settling within the 104th price level. Sellers loosened their grip by the end of the US session on Monday, after which the pair began to attract buyers.
It should be noted that the economic calendar for Tuesday is virtually empty - the US indicator of consumer confidence is the key release of the day. Japan published a service price index among corporations (it reflects the annual rate of inflation of prices for services consumed by companies and is a leading indicator of consumer inflation) during the Asian session. The release was on par with forecasts (a slight increase to 0.8% from the previous value of 0.5%), but market participants actually ignored it.
This means that today the price dynamics of USD/JPY will continue to be determined by the factors that were in the spotlight yesterday. The list is small: the coronavirus, US-China relations and the prospects for a Republican bill on additional financial assistance to the US economy.
The situation with coronavirus remains severe in the United States, although the daily increase in infected people fell below the 60,000 mark yesterday – for the first time since July 19. However, in this case, we are not talking about any drastic decrease in the indicator - according to preliminary data, 59,584 cases of COVID-19 were detected in the US on Monday. In other words, the daily increase in the number of patients remains de facto at a high level. The greatest concern is caused by Florida, where about 10,000 cases of coronavirus are registered every day. Miami has already decided to close beaches, as well as recreation parks, some stores and casinos. The mayors of Miami beach and Fort Lauderdale, where the most popular beaches are located, issued similar orders to close them.
News from the front of the fight against COVID-19 provided a small relief for the dollar. American company Moderna, which is developing its coronavirus vaccine together with the US National Institutes of Health, has just announced the beginning of the next, final, stage of clinical trials. They will be attended by 30,000 volunteers — this is the world's largest study of the COVID-19 vaccine.
However, here it is necessary to warn that the influence of this news may have a limited impact. On the one hand, Moderna was the first company in the United States to mass-test its vaccine. But on the other hand, the first results of these tests will appear only in a few months, while the coronavirus threatens the American economy now.
Yesterday, Republican senators presented a new package of economic stimulus measures worth about a trillion dollars in the Upper House of Congress. This bill looks much more modest than its three-trillion-dollar predecessor. For example, the weekly subsidy to unemployment benefits is proposed to be reduced to $200 from the current $600. The submitted document was received ambiguously by the senators. Both Democrats and some Republicans have already expressed their disagreement with some points of the bill. Therefore, the White House will have to work hard to ensure that the proposed document goes through the millstones of the Senate and (especially) the House of Representatives, where the majority is controlled by the Democrats.
However, it is not just domestic policy issues that put pressure on the dollar. Washington's foreign policy decisions also make themselves felt. As you know, China and the United States exchanged the closure of consular facilities in Houston and Chengdu. This suggests that the improvement of bilateral relations is not expected in the foreseeable future. This factor exerts background pressure on the dollar and at the same time – background support for the yen.
Thus, the fundamental picture for the USD/JPY pair has not changed since yesterday. Therefore, long positions on the pair look risky – the corrective upward pullback may be limited. The dollar will strengthen its position only if traders see signs of negotiability between Republicans and Democrats in the context of the discussed package of assistance to the US economy. In this case, the USD/JPY pair can show growth to the middle of the 106th figure. But it is still impossible to talk about a dollar rally even if this scenario is implemented: according to many experts, the proposed bill will undergo significant changes in Congress and will significantly differ from the original version. In addition, the amount of one trillion dollars announced by the White House corresponds to the lower limit of market expectations.
All this suggests that at the moment it is necessary to take a wait-and-see attitude, observing the behavior of the USD/JPY pair at the borders of the 106th figure. If buyers are unable to enter/consolidate in this price area, sales of the pair will be relevant again - at least to the bottom of the 105th price level.