USD/JPY bears are moving in as the US dollar grows weary

• USD/JPY is stalling on the bid although the backdrop is one of risk-on.
• USD/JPY bears are looking for a downside extension the daily time frame.

Risk has been on and Wall Street’s main indexes were sharply higher in early trade on Tuesday following the gains in Asian stocks at the start of the week after a reserve ratio cut by China’s central bank bolstered sentiment. 

Easing Omicron COVID-19 variant worries and the timely booster shot of Chinese stimulus has helped lift riskier currencies and has weighed on the yen this week so far. However, the US dollar is growing weary in recent trade. Nevertheless, at the time of writing, USD/JPY is trading 0.2% higher at 113.72 within the 113.40 and 113.77 range of the day so far.

Markets have taken confidence from the reports in South Africa that Omicron cases there had only shown mild symptoms. The top US infectious disease official, Anthony Fauci, told CNN on Sunday “it does not look like there’s a great degree of severity” so far. 

Developments in China contributed to the risk-on tone, as the People’s Bank of China (PBOC) said it would lower the amount of cash that banks must hold in reserve. This was its second such move this year. Investors are cheering the measure to release liquidity to support economic growth. The PBOC also cut the rates on its relending facility by 25 basis points to support the rural sector and small firms.

Data on Tuesday has also shown that the US trade deficit narrowed sharply in October as exports soared, potentially setting up trade to contribute to economic growth this quarter. The combination of these factors has helped the US dollar to firm versus its major currency peers, with the US dollar Currency Index DXY higher 0.21% at 96.499, just shy of the one-week high of 96.592 printed earlier today. Additionally, supporting the greenback, the US 10-year yield is higher by some 2.37% today, trading between 1.429% and 1.470%. 

”We believe the underlying trend for a stronger dollar remains intact as the Fed is moving closer and closer to liftoff sooner than markets previously thought,” analysts at Brown Brothers Harriman argued. 

There will be no Fed speakers given the pre-FOMC blackout period so the focus will be on the US Consumer Price Index data on December 10. ”We expect inflation to slow significantly as fiscal stimulus fades and supply constraints ease, but we don’t expect the data to be validating in the near term,” analysts at TD Securities said. ”The CPI likely surged in Nov, with a drop in oil coming too late to avert another large gain in gasoline and core prices boosted by rapidly rising used vehicle prices and post-Delta strengthening in airfares and lodging.”

Russian tensions

Investors will also keep an eye on developments on the US-Russia diplomatic tensions, as Biden is reportedly considering sanctions on Russian banks if Russia invades Ukraine. Russia wants guarantees that Ukraine will not try to seize areas captured by Russian-backed separatists in 2014 and has warned the West not to cross “red lines” by adding Ukraine to Nato’s military alliance. ”More than 90,000 Russian troops are believed to be massed near Ukraine’s borders,” the BBC reported. 

The talks between the two nation’s, leaders Vladimir Putin and US President Joe Biden, began at 10:07 US Eastern time (15:07 GMT; 18:07 Moscow time), the White House said. They were held on a secure video link set up under previous administrations but never used before, Russian news agency Tass said. 

In a conference call on Monday night, the White House said the leaders of the US, UK, France, Germany and Italy had formed a joint strategy “to impose significant and severe harm on the Russian economy” should Russia launch an invasion. President Biden is expected to speak to the four European leaders again after his talks with Mr Putin.

The BBC has reported that ”possible measures include restrictions on Russia’s banks converting roubles into foreign currencies, or even disconnecting Russia from the Swift global financial payment system, reports say.” Bloomberg News reported that the US would seek to halt Russia’s Nord Stream 2 pipeline to Germany.

USD/JPY technical analysis

The price is unable to get over the counter trendline resistance or away from the 21-EMA on the hourly chart. The market is moving into a consolidation of US dollar strength and the yen is closing the gap on the Currency Strength Index on an hourly basis. 

Moreover, from a daily perspective, the price is stalling at a 38.2% Fibo and could easily flip to the downside at this juncture: