USD/JPY bulls taking back control in the face of COVID-19 risks and trade wars

• USD/JPY creeping higher and bucking the downtrend.
• USD in favour at the start of this week with plenty of unknowns out there.

USD/JPY is currently trading at 107.70 and is higher by over 1% having travelled from a low of 106.49 to a high of 107.73. The US dollar has been climbing from the word go at the start of this week. There appears to be some hesitation with respect to governments around the world seeking to gamble the costs of closed economies vs the health of the population.

Getting the world economy back on track will be a slow burner thwart with social health risks 

Getting people back to work safely will take time and the number of people out of work and businesses which will be reluctant to re-employ with the risks of a second wave of the virus. Coupled with trade wars rearing its ugly head again, the DXY could be set to remain elevated within April's range – 100.80 is a key level with that respect. 

On the other hand, if we continue to get workers back to their desks without there being any significant spikes in new cases of COVID-19, then that could be a bearish factor for the US dollar and we could well see some unwinding. The Yen has been left behind at times of flights to safety throughout March, so there is some catching up to be done should the sentiment flip in the US dollar. It is also worth noting that demand for foreign bonds by Japanese residents has dropped which could imply that there is less of a likelihood that USD/JPY will be able to climb much higher without such a supporting driver. 

Looking ahead

For the week ahead, there is nothing too spectacular to look out for following last week's dismal Friday's Nonfarm Payrolls. For instance, we have top tier data but the market is expecting it to be terrible news and it is likely already factored into the price of financial markets. Nevertheless, we will have the Consumer Price Index on Tuesday, Retail Sales and Industrial Production will both come on Friday. Politics, on the other hand, could be more of a catalyst if there are any further trade war escalations. The stock markets will also be keeping an eye on how the Supreme Court rules on whether President Trump needs to publicly release his financial records.

USD/JPY levels

We are seeing bullish divergence on the daily time frame which supports a trip back to the 108 handle and the 200-day moving average. Analysts at Commerzbank highlight targets of 109.38 as the April high ahead of 111.71/112.23 February and March highs. On the flip side, bears will seek a break of the 105.90s with 105.16 as a 61.8% Fibonacci retracement of the March rally.