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- Easing in China may lead to new covid infections and subsequent lockdowns.
- The US housing market is weakening, potentially leading to lower long-term rates.
- Stocks staged a fierce correction and may be ready to fall.
USD/JPY bearish – the broader trend is to the downside, and the most recent rise may prove to be a selling opportunity. Why?
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1) China has eased restrictions for residents in Beijing and factories in Shanghai, but that has come after covid cases dropped. For policymakers, recent developments only serve as a vindication for their zero covid policy. There would be fresh lockdowns when new cases appear – and with Omicron and its subvariants, contagion is high.
The yen tends to benefit in response to adverse news in China. Investors repatriate funds to Japan, undoing lending in cheap yen. That could happen again in response to the next flare up.
2) US housing weakness: Jumping to the other side of the Pacific, the US economy has recently shown signs of weakness, especially in the housing sector. Both pending and new home sales fell well below expectations in April, exposing softness. Have mortgage rates gone too far? That would imply a drop in long-term yields is coming, and that weighs on USD/JPY. Returns on 10-year Treasuries and the currency pair are well correlated.
3) Correction may end: Another factor in favor of further drops for USD/JPY is a resumption of the falls in US stock markets. American shares have staged a massive comeback, breaking a long losing streak. However, they could resume their decline without any fresh optimistic news. The “buy the dip” move may make way for a “sell the rally” response.
USD/JPY Technical Analysis
Technically, USD/JPY is struggling to recapture the 4h-50 Simple Moving Average (SMA) while the 100-SMA is breaking below the 200-SMA, another bearish sign.
Support is at 126.90, which was a low point in recent days, and then 126.35, the monthly low in May. Even lower, noteworthy support is only at 125. Resistance is at 127.60, which capped the pair in recent days and also served as support beforehand.
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