USD/JPY tentatively back above 113.00 amid better tone to Omicron news

• USD/JPY has recovered back to the north of the 113.00 level on Monday.
• Positive Omicron news is being touted as weighing on the demand for safe-haven/low-yielding currencies.

USD/JPY moved modestly higher on Monday, but continues to trade to the south of its 50-day moving averages at 113.43, which has acted as a lid to the price action since the start of the month. The pair on Monday bounced from close to last Friday’s near-112.50 lows and is now trading comfortable back to the north of the 113.00 mark in the 113.10s, with on-the-day gains of about 0.3%.

According to market commentators, the pair is being supported by positive Omicron-related news which is weighing on safe-haven and low-yielding currencies (like the yen) which have benefitted recently from the idea that Omicron would hurt the global economy. According to South African health officials, the severity of most symptoms in hospitalised patients with Omicron (including infants) has thus far been mild. But the variant is known to be highly transmissible, and it remains to be seen how badly health authorities in countries like the USA, UK and in Europe panic when infection rates there inevitably accelerate sharply in the coming weeks. The risk of an over-reaction to high infection rates (that doesn’t take into account mild symptoms and low hospitalisations) is a risk to the near-term economic outlook.

For now, continued uncertainty about how the next few weeks and months will shape up regarding the spread of Omicron and reaction to it seems to be enough to keep the gains in USD/JPY capped. This is mainly due to the fact that long-term US government bond yields (US/Japan rate differentials are USD/JPY’s most important driver) remain subdued and close to recent lows. One factor capping longer-term yields, aside from concerns about Omicron, are apparent fears that the Fed’s eagerness to press ahead with monetary tightening in 2022 to tame inflation despite pandemic risks may dampen the longer-term economic outlook.

For USD/JPY to break above the 50DMA and press on towards the 21DMA just under 114.00 and then recent highs in the 115.50 area beyond that, long-term US yields will need to recover. In a scenario where states in the US respond to rising infection rates (driven partially by Omicron) with tighter economic measures, this might further weigh on long-term yields. Between 112.50 and 112.00 there are a lot of key support levels going all the way back to April 2019, but if these are broken, that could open the door to a swift move lower towards 109.00, the next area of key support.