USD/JPY testing the commitments of the bulls at the critical 110 psychological level

• USD/JPY moves in on the 110 handle, but too much too soon?
• USD/JPY may struggle to find bids while the coronavirus is a risk still at large.
• Despite higher equities, contagion risks are very concerning and gold/yields paint a fuller picture.

USD/JPY is anchored below the 110 handle while traders ponder as to whether equities and risk appetite is wholly justified at this juncture. USD/JPY is pushing the barrier here and once again approaching the highest levels for the year in the 110.20s.

USD/JPY has printed a high of 109.99 today following a stellar performance on Wall Street as we head towards the final hour of trade as the market's bullish risk-on tone continued despite downside risks. 

Global equities have moved higher in a spectacular fashion on better-than-expected US corporate earnings results and US data of late. At the time of writing, the S&P 500 made new record highs to 3347.96, up som 0.4%, completing a full recovery of the coronavirus rout, yet despite that, there have still not been any conclusive signs that the virus can indeed be contained. 

"Uncertainty about the scale of the human and economic impacts of the new coronavirus is extreme, not just for nations who export heavily to China, but also for the many firms who have built China into supply chains," analysts at ANZ bank explained, adding: 

"It would seem too soon to conclude that we are looking at a similarly short-term impact as SARS in 2003 – China’s integration into the world economy is far greater, as is the scale of the challenge in terms of containing the virus. But investors seem desperate to not miss the opportunity to buy the dip."

• “Made in China” Economic Hit Coming Right Up

While there could still be some upside in USD/JPY, any signs that this virus will not be terminated in the near future and or how badly the Chinese economy will be affected, the contagion to the wider global economy and the subsequent impact on the reflation trade is bound to set-off a flight to safety on the knee jerk – yields and gold are certainly telling a different story – that rates are going to zero, and in the long run, that should be bullish for the likes of the yen. 

Markets getting set fo Nonfarm Payrolls

Ahead of tomorrow’s US January labour market report, US bond yields were little changed. The US 10-year yield is flat at 1.65% and the yield on the bund was also down 1bp at -37.2 basis points. Gold is currently up 0.8% at $1,565.2/oz.

"We expect a mild-weather boost to US payrolls to be offset by payback in retail and slowing in the trend (with downward revisions back to 2018), but the Jan data are especially subject to surprise," analysts at TD Securities explained. 

USD/JPY levels