Another round of the pandemic boosted the demand for safe havens. Investors believe that the central bank will abandon any plans for monetary normalization because of COVID-19. Is it so? Let us discuss the Forex outlook and make up a USDJPY trading plan.

Weekly yen fundamental analysis

According to the Infectious Diseases Society, the spread of the delta coronavirus variant has pushed the threshold for herd immunity from 60%-70% to well over 80% and potentially approaching 90%. This will be very difficult to achieve given the slowdown in vaccination in the United States. The economies will have to adapt to the coronavirus, and central banks understand that they should not make monetary policy dependent on the pandemic waves. The Reserve Bank of Australia did not want to change its plans to roll back monetary stimulus, despite Sydney’s lockdown and the growing risks of a new recession. This example could inspire other central banks to tighten monetary policies, pressing down safe havens, such as the Japanese yen and Swiss franc.

The yen and the franc enjoy increased attention of investors in July-August. Amid the Delta spread and the desire to avert risks, the USDJPY was down to its monthly lows. The information that the existing vaccines protect against the new strain of the coronavirus discouraged the dollar bears.

Dynamics of COVID-19 cases and safe havens

Source: Bloomberg

The yen buyers are supported by a decline in Treasury yields, which narrows the spread between the US and Japanese bind yields. Japanese investors wring their money back to the country, as they have no better alternative. Emerging Markets are not considered due to the low availability of vaccines and the associated risks of slow economic recovery. Germany’s 10-year bond yield is down to the lowest level since February, the 30-year yield is below zero, making the yields on all bonds negative. In general, the global negative-yielding bond market volume increased to $16.5 trillion and moved towards its all-time high of $18 trillion.

The matter is when the interest rates will start rising. Based on the idea that the pandemic will eventually be defeated and the global economy will continue to recover, the rates will inevitably rise. According to JP Morgan forecasts, the Fed will reduce the asset purchase pace under the QE from $960 billion in 2021 to $316 billion in 2022. Therefore, the long-term USDJPY is bullish. The medium-term prospects will depend on the Fed’s willingness to act according to the plan and the global epidemiological situation.

The 10-year Treasury yield could rise from a six-month low because of the US strong employment data. According to the FOMC member, Christopher Waller Federal Reserve could begin slowing down its $120-billion bond purchases once the non-farm payrolls add 800,000 – 1 million in July and August.

Weekly USDJPY trading plan

Jerome Powell’s replacement Lael Brainard as chairman of the Federal Reserve could shake the debt market. However, it is too early to talk about it. If the US jobs report is strong, it will be relevant to enter USDJPY longs on the breakouts of the resistance levels of 109.85 and 110.15. If the US employment data are weak, the pair will continue declining.



Price chart of USDJPY in real time mode

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