At the turn of winter and spring, funding currencies attract the most attention from investors. The slowdown in global GDP under the influence of coronavirus, the fastest drop in US stock indices from record highs in history, the collapse of oil prices and increased risks of a recession in the US economy made the yen and the euro the main favorites on Forex. Interest in the single European currency is fueled by the proximity of the ECB meeting, and to the currency of the Land of the Rising Sun – by talking about the recurrence of the flash accident that took place in January 2019.
Active purchases of such profitable currencies as the Mexican peso and the South African rand cost Japanese retail investors dearly. The carry traders who bet on the yield differential were forced to massively wind down longs for MXN/JPY and ZAR/JPY amid the most rapid collapse in oil prices since the Gulf crisis. Black gold also serves as a kind of indicator of the health of the world economy, so that more than 30% subsidence of Brent and WTI per day seriously scared fans of currencies of developing countries. Their sales added fuel to the yen’s strengthening fire.
The dynamics of speculative positioning in the MXN/JPY and ZAR/JPY
Along with high demand for funding currencies, “bulls” for EUR/USD and “bears” for USD/JPY are keeping the situation under control due to the limited potential for monetary expansion by the ECB and the Bank of Japan. In contrast to the Fed, which can afford to reduce the Federal funds rate to zero by the end of 2020, as well as revive QE, the BOJ’s balance sheet is already inflated to the limit, and the European regulator’s deposit rate is negative. Its further deepening into the red zone will do more harm than good for the eurozone economy. Cheap money will not make the population of the currency bloc frightened by the coronavirus spend it.
Not all major banks predict changes in the ECB’s monetary policy, including the deposit rate and the expansion of the asset purchase program. BofA Merill Lynch, Morgan Stanley, and HSBC believe that Christine Lagarde and her colleagues will not change anything. The euro falls short of $1.15, and the regulator will begin to show its displeasure at the levels of $1.2 or $1.25.
Forecasts for changes in the ECB’s monetary policy
Interestingly, the success of the euro and the yen is taking place against the backdrop of serious slowdowns in the economies of the eurozone and Japan. Because of the coronavirus, Italy and the Land of the Rising Sun are likely to slide into recession. Against this background, the United States, with its strong labor market, looks like a kind of island of stability in the ocean of the global recession, but this fact does not help the US dollar. It is actively losing ground due to the deterioration of global risk appetite and the aggressive monetary expansion of the Fed.
Technically, the EUR/JPY pair met targets of 88.6% and 161.8% for the “Shark” and AB=CD harmonious trading patterns, which increases the risks of a pullback in the direction of 23.6%, 38.2% and 50% for Fibonacci from the last descending wave. On the contrary, updating the March minimum will allow the bears to expect a continuation of the peak to the target of 113% for the “Shark” model.
EUR/JPY, the daily chart
The material has been provided by InstaForex Company – www.instaforex.com
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