USD/JPY bulls holding on by skin of their teeth, corrective wave consolidates

• USD/JPY is a ticking time bomb to the downside, technically and 'COVID-19-allly'.
• Optimism in markets is propping up the pair in an otherwise risk-off bear trend. 

USD/JPY is consolidating following a corrective wave and bears are waiting for signs of the next downside impulse, anticipating the next negative headline to kick of another bout of risk-off in financial markets.  At the time of writing, USD/JPY is trading at 107.95 having stuck to a range of between 107.12 and 108.29 for the day, but moving sideways and oscillating around the day's point of control (108.030 through a relatively calm New York session.  

The markets are weighing the outlook for the global economy pertaining to the COVID-19 pandemic, holding on for fear of an increase of cases in due to China relaxing its social distancing, in an attempt to kick start the economy. The expectations of a bell curve in the rate of infections and prospects that all nations will experience the same timeline are encouraging markets to ride this one out, cheering the timely and aggressive monetary and fiscal policy easing.

"Policymakers have learned important lessons from the failures of the Depression and from dealing with the GFC," analysts at Deutsche Bank argued.

"The Fed and ECB were quick to pull out all the stops to inject liquidity and confidence into financial markets. The scale of fiscal easing on both sides of the Atlantic has already exceeded the early days of the GFC. Monetary and fiscal policymakers are pledging to do whatever is necessary to fight the virus crisis."

Are markets too optimistic? 

The race to find a vaccine with J&J vaccine candidate’s Phase 1 trials to start in September is another encouraging factor, along with the news that Abbott Laboratories has come up with a coronavirus test that takes five minutes (testing was a key factor in South Koreas tactic).  While the epidemics sweep through the corridors of hospitals and concerns of there being no ventilators, news that General Motors and Medtronic will make and sell ventilators at cost is also encouraging for risk sentiment.  Markets are finally starting to see a light at the end of the tunnel, despite the tragedies that are facing humanity and the global economy which are as plain as the eye can see.

However, this is a fluid situation. If it is proven that there is too much optimism out there, this can very quickly backfire and the yen could well be the go-to place for safe-haven flows this time around since the central banks have seemingly freed-up the dollar FX swap lines, especially should Japan keep COVID-19 contained to localised clusters. 

USD/JPY levels