- The yen has returned to attracting safe-haven flows as China's covid crisis intensifies.
- Fear of a Fed-fueled recession is pushing 10-year Treasury yields lower.
- Technicals are pointing to a clear peak and a clearer downtrend.
USD/JPY bearish – there are good reasons to expect the currency pair to fall, and the trade seems more straightforward than other ones.
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The yen benefits from safe-haven flows related to China's aggressive policies against covid. Lockdowns in Shanghai and Beijing, the world's second-largest economies largest and most important cities, are hurting the economy. Recent retail sales figures showed a plunge of 11.1% YoY in April, nearly double the early expectations and a sign of falling demand.
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Not only consumption is dropping. Industrial output also badly missed estimates with a fall of 2.9% YoY, worse than the 0.5% increase projected. Japanese investors are repatriating investments in China and other places in Asia. The yen's status as a safe currency is mostly seen when there is trouble in its own continent.
The second reason for the USD/JPY decline – and the potential for more – comes from the US. The Federal Reserve's aggressive policy of raising interest rates has been positive for the pair, especially as it contrasted with the Bank of Japan's dovish policy. However, there can be too much of a good thing.
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While short-term Treasury yields continue rising – reflecting expectations for higher inflation and higher borrowing costs – the part that is relevant to USD/JPY is turning south. Returns on 10-year bonds have declined from their peak above 3% as investors begin pricing in growing chances of a recession. Lloyd Blankfein of Goldman Sachs said it is "a very high risk" and that consumers and businesses should get ready. That prophecy may be self-fulfilling.
Third, the technical tide has turned against the pair. It has begun trading in a downtrend channel, with lower highs and lower lows. Momentum on the 4h-chart has turned negative, the RSI has failed to climb above the 50 level, and the price is capped at the 100-SMA – after falling below the 50-SMA.
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Support is at 128.70, which cushioned the pair twice in May. The monthly low of 127.50 is the next level to watch, and it also converges with the 200-SMA. Further down, 126.90 and 126.40 are noteworthy. Resistance is at 1.2950, and then at 130.90.
The list above provides ample ammunition for bears, and bulls may need to cling to hopes for further yen-printing from the Bank of Japan – a highly unlikely scenario given the current, already extremely loose monetary policy.