Panic in the market is good news for safe-haven assets. Speculators were so scared by the news of the emergence of a new strain of COVID-19 that they increased net longs for the U.S. dollar against six major world currencies to the highest level since mid-June 2019. Taking into account contracts for the New Zealand dollar, Brazilian real, Mexican peso, and Russian ruble, the net long position on the U.S. dollar reached $24.4 billion. In the week of November 30, it managed to shut up all its main competitors, except for the yen. Which, by the way, also refers to assets-saving harbors.
History repeats itself. Just like in March 2020, when speculators bought up the Japanese currency on the news of the beginning of the pandemic, they are buying it now because of Omicron. Although the virus has acquired different strains, the essence is the same: lockdowns, recession, panic in the markets, yen growth. Hedge funds reduced net shorts on it by 40% in a week, which was the fastest dynamics since last spring. Is it any surprise that the USDJPY quotes have fallen to the lowest levels since early October?
Dynamics of speculative yen positions
Two themes dominate the financial markets today: Omicron and the Fed's willingness to speed up the normalization of monetary policy. News of the latest COVID-19 strain is controversial. If Moderna claims that existing vaccines will not be able to protect against it, then the medical advisers to the President of the United States believe that Omicron is harmless. At the same time, Goldman Sachs lowers the forecast for U.S. economic growth, believing that the impact of the new version of the coronavirus on GDP will be the same as that of the Delta.
The Fed is not at all sure about that. Chairman Jerome Powell abandons the mantra about the temporary nature of inflation acceleration and hints at accelerating the process of tapering QE. It seems that Omicron doesn't bother him at all. Are weak U.S. employment data for November worrying? The indicator increased by 210,000, which was the worst dynamics since December last year. At the same time, unemployment fell to 4.2% against the FOMC forecast for the end of 2021 at 4.5-5%. This circumstance allows counting on the "hawkish" rhetoric of the central bank at the meeting on December 14-15, which should support the U.S. dollar.
In my opinion, the return of the USDJPY pair above the 115 mark is hindered by uncertainty around the new variant of the coronavirus. Is it really more dangerous than the previous ones, or will it eventually become a new type of seasonal flu with mild symptoms of the disease? As soon as the situation clears up, the yen will lose its main trump card. Monetary policy will return to the focus of investors' attention, and here the U.S. dollar is ready to give the Japanese currency a head start. Indeed, if the Fed will discuss the rapid curtailment of QE in December, the Bank of Japan does not rule out the possibility of expanding incentives amid uncertainty due to Omicron.
Technically, a Broadening Wedge pattern was formed on the daily chart of the USDJPY pair. Within its framework, there is a consolidation in the range of 112.5-113.5. The breakthrough of its upper border is a reason for the formation of longs with targets at 115 and 116.
USDJPY, Daily chart