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Risk-off sentiment pushes traders into the Japanese yen

The markets are caught between continued disruptions across Asia due mainly to the coronavirus and good earnings from the West. Positive data out of the UK regarding infection rate should see the GBP strengthen against countries struggling to vaccinate their population.

Market Brief

There were some big moves in the overnight session with Asian equities generally dropping on continued coronavirus disruptions and Chinese regulatory measures. The Hang Seng dropped -5.30% and the Shanghai Stock Exchange was down -2.49%. Tokyo’s daily infection rate jumped above 3000 but the money market reacted positively to news that the Japanese government has helped businesses with subsidies that now exceed 4 trillion yen. Employment adjustment subsidies are provided to businesses that put workers on paid leave. To tackle the coronavirus crisis, the daily limit on subsidies has been raised to 15,000 yen per worker.

The Nikkei 225 has followed the rest of the Asian indices lower and the H1 Ichimoku cloud is currently acting as a great trend indicator.

The forex heat map shows the strength of the yen today with the above charts of the USDJPY and EURJPY also showing the extent of today’s gains in the yen against 2 major crosses. The EURJPY had looked likely to test higher on yesterday's close as it broke out of the descending channel. The move in the EURJPY could be a retest of the breakout but that will depend largely on the US dollar too. If the US dollar index breaks down, that will drag the USDJPY with it, but the rising euro could put the EJ in a prolonged sideways consolidation.

Based on the current risk-off sentiment and the weakness in the New Zealand dollar, I would be tempted to take a short in the NZDJPY, especially as it is testing the previously broken support to see if it will hold as resistance.

The London open saw the US dollar index attempt to trade back into the rising channel that it broke out of yesterday. We have durable goods orders and the US consumer confidence data out this afternoon, which may set the tone for the remainder of the day. Big earnings out as well in the tech industry which could add a little volatility to the Nasdaq and S&P500.

Last night Tesla reported increasing profits, despite shortages of semiconductor chips and congestion at ports hampering production.

The Q2 sales rose to $12bn, up from $6bn a year ago when its US factory was shut down.

The weakest link in the tech industry seems to be the shortage of chips and this will be detrimental to any company that relies on them.

The good news in the UK comes from the drop in people testing positive for COVID-19. The nation has its fingers crossed that the average infection rate continues to drop as the ‘Freedom Day’ data starts to be included in the 4-week average.

Cable had dropped from the start of the European session but has paused at the breakout level. If this once resistance can hold as support, the next target will be the swing highs from the 12th-13th of July and the 1.4000 big figure.

The ActivTrades sentiment indicator shows that more retail traders are short the GBPUSD, so for anyone with a contrarian view to that, this should be seen as a positive. Price is likely to accelerate higher as these traders add to their shorts or end up puking their position. However, there is the possibility that the US dollar accelerates higher into the rising channel it had been trading in and that would apply pressure to the downside of the GBPUSD.

The focus this week for the US dollar will still be the FOMC, so any directional moves may be unwound as traders generally like to be in a range before the Fed.

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