USD/JPY Down 200 Pips In Two Days As Investors Flee To Safe Havens

on Feb 25, 2020
Updated: Apr 3, 2020
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  • USD/JPY retreats towards $110.00 as the risk appetite worsens
  • “The situation is very grave,” says South Korean President as the number of coronavirus cases approaches 1,000
  • A failed breakout in USD/JPY may facilitate a deeper pullback as the key support at $109.80 awaits the first test

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USD/JPY has retreated from the multi-month highs above the $112.00 mark on the fears that the coronavirus outbreak is going to hurt the global economy and businesses more than previously anticipated.

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Fundamental analysis: Risk appetite worsens

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After weeks and months of preparing a push higher then finally saw USD/JPY hit a 10-month high of $112.22 on February 20. In the meantime the coronavirus outbreak to Europe has facilitated a sharp sell off on Wall Street that hit equities hard.

In a correlated move, the Japanese yen has gained against the greenback, pushing the price back towards $110. The risk is now clearly to the downside as negative headlines dominate the global discourse.

“The situation is very grave. We will achieve a victory in the fight against this virus,” said South Korean President Moon Jae-in as the country is approaching 1,000 of the total number of cases.

There was a fresh sell-off yesterday morning as investors followed up on the worrying headlines from Italy, where the death toll has risen to five.

“At this point, we know that the way one hospital facility was managed was not entirely appropriate. That certainly contributed to the spread,” said Italian Prime Minister Giuseppe Conte.

Given yesterday’s market behaviour and sharp sell-off in equities and high-yielding assets, the investors are obviously worried that the coronavirus outbreak will weaken the world economy further.

Technical analysis: A failed breakout

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Yesterday’s sell-off, which actually started on Friday, contributed to the creation of a failed breakout. A market development of this type occurs when the price moves through a previously identified level of support or resistance, but does not have enough momentum to sustain its direction.

The failed breakouts usually lead to a sharp move in the opposite direction, which is what we are seeing here. The price action is now approaching the key short-term support at $109.80, a level which may be seen by investors as a solid opportunity to buy USD/JPY and hope for the improvement in the global risk sentiment.

USD/JPY weekly chart (TradingView)

“The manner by which USD cracked 111.20 and the subsequent plunge to a low of 110.32 came as a surprise. The price action suggests that last Thursday’s (20 Feb) high of 112.21 is a top, albeit likely a temporary one. From here, USD could continue to trade in volatile manner but is expected to stay to within last week’s broad 109.64/112.21 for a while,” FX Strategists at UOB Group said.

Summary

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A global sell-off of equities yesterday saw the Japanese Yen generate a lot of buying interest as investors flee to safe havens. The sell-off facilitated a rotation lower, as the price action now approaches key short-term support at $109.80.

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