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USD/JPY continues downward slide as US reports first community spread

US markets, including the dollar, were shaken on Thursday, after the country confirmed its first COVID-19 case 'of unknown origin'.

Source: Bloomberg

Since our last update, the USD/JPY (大口) has retreated another 1.4% to under ¥109.000 as of 3pm on Friday 28 February SGT.

Just when the currency pair was thought to be finding some stable ground along the 110.350 level (Wednesday 26 February), the United States’ first confirmed coronavirus case 'without a known origin' less than 24 hours later very quickly rocked the US dollar.

US stock markets have since gone into correction mode – the quickest in history with the S&P 500 plummeting as much as 4.4% on Thursday 27 February alone and 12% in just six days, bringing down with it US financial markets, including the greenback.

IG analyst: USD/JPY under pressure all week

As IG Asia market strategist Pan Jingyi had earlier predicted, downsides should be expected for the USD, with this latest wave of coronavirus outbreak.

According to Pan, the USD/JPY had been under pressure all week (alongside the US market), reflecting the strong risk aversion sentiment of investors on the back of growing coronavirus concerns.

‘Evidently the first coronavirus case in the US with unknown origins appeared to have sparked concerns over community infection,’ she wrote. ‘That said, more importantly, a heightened sense of fear had captured global markets with warnings of a global recession, as new cases showed up in more parts of the world’.

She added that with the highly contagious virus continuing to rear its ugly head in these past two weekends, it is therefore ‘no surprise’ that investors are ‘seeking shelter’ toward the latter part of the week.

‘Correspondingly, it is blood shed for equities, with safe havens (like the yen) where most are headed,’ she added.

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Japanese yen re-gaining safe haven status

With the US market becoming shakier, Pan said that the yen could be strengthening as a response to the increased risk sentiment.

To some extent, the steady drop in the USD/JPY throughout this week reinstates yen’s reputation as a safe-haven currency, she added. That is because markets were beginning to have their doubts about the fiat money’s safe haven status last week, with Japan having the highest number of confirmed COVID-19 cases (over 800) outside of China.

Analysts at US financial services firm Action Economics had also shared the same sentiment, stating that investors and traders might be overlooking the yen’s traditional risk-free qualities.

‘In the scheme of things however, given risk-off conditions, and heightened coronavirus concerns, USD/JPY has held up relatively well,’ the analysts wrote in a note.

‘There was talk last week of early portfolio flows into the dollar ahead of Japan’s fiscal year end on 31 March, with pension funds rumoured to have been big buyers. These flows may continue, and despite the current risk-averse conditions, may limit USD/JPY downside for now.’

USD losing ground on indications of Fed rate cuts

Coupled with growing expectations of the US central bank cutting interest rates by 25 basis points in June, the USD has not had much room to grow against the Japanese yen, since hitting a ten-month peak of ¥112.216 last Thursday 20 February.

When interest rates fall – as in this case, demand for a country’s currency tends to fall as well, as investors hold less of a currency since there is less benefit to putting their money in the country’s banking system. This leads to a decline in currency value.

Nevertheless, US Fed officials quickly told local media that ‘it is still too soon to even speculate about either the size or the persistence of these effects, or whether they will lead to a material change in the outlook’.

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