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Chart of the day: USDJPY recovering after the heavy decline

USDJPY weakened 2.88% on Monday, sending the JPY to 102.36 per dollar after hitting the session low of 101.18 - a level not seen since November 2016.

Crude oil tumbled the most since the Gulf War in 1991 as Saudi Arabia started an oil price war to lower its export price. The oil shock rattled the equity and FX markets across the globe. Petro currencies like CAD, NOK and MXN plummeted, while the JPY outperformed due to the safe-haven flow.

The US market

The US has been already criticised for its slow action to the spread of coronavirus, which has caused more than 600 infected cases and 24 deaths. Now the oil crash has given another heavy blow to the US, a net oil exporter with a relatively high cost of shale oil production.

Investors flocked into US Treasuries, pushing the 10-year yield below 0.5% and the 30-year yield under 1%. The corporate bond yield widened against treasury yield, making refinancing more difficult for companies who've enjoyed the low financing costs for such a long time. The interest rate market has priced in a 75bp rate cut on the 18 March FOMC meeting, weighing on the USD in the near term.

Japan’s challenge

The Bank of Japan is stuck between a rock and hard place, as they will not be happy with the one-sided JPY moves, yet there is not much they can do about it. Any FX intervention and direct selling of JPY in the markets will be watched closely by the US and will risk strong condemnation. Now the oil price war is putting further pressure on the policy makers and risk sentiment more broadly and oil remains central to the market.

Technical analysis

The movement of JPY, the risk proxy currency, is mainly driven by the equity market and oil price. Since the S&P 500 futures (+2%) and WTI crude futures (+4.3%) are recovering during the early Asian session on Tuesday. it's no surprise to see that JPY also bounced off the multi-year low and is trading at 103.23, with the RSI quickly moving north.

USDJPY chart

Considering the USDJPY 1-week implied volatility has increased to 32% and the highest since 2008, the market expects big moves. The pair might easily reach and test the key support-to-resistance level of 104.45, which is also a confluence with 5 EMA.

It is interesting to watch the price action around this level (104.45). The pair needs to fill the 104.16/99 gap to regain the upward momentum and further challenge 105.40, the 38.2% retracement level.

On the other hand, the price will be dragged lower should the sellers kick in here. The next level to beat for the bear is 101.18 followed by the 100.00 mark.

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