USD/JPY: THE catalyst for the Risk-On movement

The first two months of 2021 were dominated by risk-taking. Risk means that the dollar literally takes over all the other major currencies with one exception: the USD/JPY. Meanwhile, US equities are on the rise.

What is interesting about this development is that a real risk-taking environment has not been in place for years now. In the aftermath of the great financial crisis of 2008-2009, central banks intervened with unconventional monetary policies of various types. As such, markets were distorted and we rarely saw such close coordination as during the first two months of 2021.

In the future, risk-on could turn into risk-off. Not only are bond yields in the US rising, but also those in Japan, but not to the same extent. The spread between the two will be decisive for the positioning of the next move in the USD/JPY pair.

Judging from the technical chart, the USD/JPY is in an uptrend and has reacted each time it has reached the upper edge of the channel. So far, it has found bids at every downside, at a dynamic support.

Traders should be ready for anything this month. It can be said that the USD/JPY is the wildcard to move forward, as it holds the key to the risk-on/risk-off environment. If we see real risk taking, the USD/JPY could fall along with the whole market. To spot this moment, traders need to focus on the lower edge of the uptrend channel.

(note: for the other 2 currency pairs to watch for this month, see last week's article)