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Chart of the day: Time to fade the USD funding rally

Since the start of 2019, we’ve seen moves in USDJPY into 112 as the defining area to initiate short positions. We’re seeing that playing out yet again, with traders having pushed USDJPY into 111.50 having seen the cost for USD funding spiking and the USD finding buyers on a broad basis.

USDJPY daily

On the daily chart, after the strong run from 101.16 we’re seeing indecision playing through in the price action and stochastic momentum. While not giving us a clear indication just yet, it looks set to roll over. Getting set for downside in the pair seems compelling, for a move into 108.

Fundamentally, the incredible $580b (2.7% of GDP) increase in the Fed’s balance sheet in the last two weeks seems to be supporting equity markets. However, it may start to weigh on the USD more intently, especially if USD funding normalises thanks to its USD swap lines with global central banks. We don’t think QE4 (QE-unlimited) will be inflationary (USD positive), as long as the Fed pay’s banks 10bp to hold capital on their balance sheet, so much of the excess reserves created will be parked here and not put to work in the real economy (inflationary).

We also see signs that the US is about to become the epi-centre of the global virus pandemic, and while economics haven’t played into USD moves, it seems likely that they will as the market comes to terms the spread of the virus in the US. With an MMT administration and a central bank that will likely be buying a further $2t of assets by June – in line with the speculated fiscal stimulus program, we look for downside risk in USDJPY, although would close shorts on a closing break of the 112.50 zone.

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