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USD/JPY: Politics back in vogue and yen picks up safe-haven demand

  • USD/JPY dropped by around 150 pips overnight and reached a low of 110.80.
  • The pair is now battling in grounds not seen since last September following a flight to safety and flows that have moved out of US stocks.

As for the perfumes of the indices, the S&P 500 ended l lower by 1.6% to around 2,467, the Dow Jones Industrial Average, DJIA, lost 464 points, or 2%, to end around 22,860 and the Nasdaq Composite Index slid 1.6% to 6,528 making for fresh 52-week closing lows. With respect to yields, the US 10yr treasury yield moved in a 2.75%-2.78% range, while the 2yr yield ranged between 2.65% and 2.67%. With the FOMC now out of the way for the rest of this year, what little trading days are left, focus looks to the March FOMC and futures priced the chance of a rate hike by March around 25% which should be a thorn in the greenback's side for the start of the New Year.  

Political risks rearing their ugly head again

For the meantime, risks are political given the US Justice Department's allegations against two Chinese nationals which is a spanner in the works with respect Sino/US trade relations. There is also concern over US government funding, with about 25% of the federal government running out of funding midnight Friday. "The Senate passed a bill extending funding to 8 February, after which many senators left Washington, DC. But House Speaker Ryan met with President Trump and then announced that Trump said he would not sign the bill if the House passed it because it lacked $5bn for a border wall," analysts at Westpac explained. 

USD/JPY levels

Valeria Bednarik, Chief Analyst at FXStreet explained that the pair has not only broken below the 100 DMA in the daily chart but currently pressures the 200 DMA, this last at 110.85, providing an immediate dynamic support. Below it, the decline could extend to 110.37, September monthly low. In the 4 hours chart, the downward potential is quite strong despite technical indicators reached extremely oversold levels, with the RSI currently at 18, and the pair now developing over 200 pips below its moving average. Upward corrective movements can't be ruled out, but selling interest will likely reappear on approaches to the 111.50/60 price zone.

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