Holiday markets have seen narrow ranges in the forex space as traders watch the unfolding reopening of the Chinese economy whilst keeping the other eye firmly on rising Treasury yields.

A bumpy exit from the zero-Covid policy in China is roiling risk-taking with investors casting doubt over the swift recovery of the world’s second-biggest economy after the relaxation of stringent Covid controls. China’s health system has come under heavy stress since Beijing started dismantling its zero-Covid regime at the beginning of this month. Huge waves of infection all over the country could be exacerbated by the nationwide travel rush for the Lunar New Year in late January.

The hoped-for bump from a quick and smooth reopening of the Chinese economy may be much harder to come by and this is hitting risky assets especially.

The dollar could see a major breakout

The dollar has not benefitted a great deal from this turn of events as the DXY has been hovering just above its December lows for a few weeks.

The longer the basket of six currencies trades in narrow, tight ranges, the more expansive and explosive the breakout could be.

The cycle low made in the middle of this month sits just below 103.5. The next support level is the pandemic high at 103.96. Initial resistance is the August low at 104.51.

USD/JPY struggling to rebound

The major FX news across the wires before the holiday period was the surprise change in the yield curve control policy by the Bank of Japan.

The immediate impact was sizeable with a 3% drop in USD/JPY and a new cycle low at 130.569.

The bank’s role as an uber-dove outlier among global central banks had been a major driver of yen weakness this year.

The question now is whether we will see broader policy normalisation in 2023 as speculation over the new governor at the bank increases as Kuroda’s term end in April.

Otherwise, the BoJ may keep on insisting that the policy tweak was simply a change to get the market functioning better.

The breakdown in USD/JPY after the shock BoJ announcement cut through the 200-day simple moving average which now stands at 136.187. That had acted as some support earlier in the month so now turns into resistance.

The low made last Tuesday bounced off the June trough at 131.493 and the August bottom at 130.396. This major support could be tested again if there are any more hints from the BoJ turning the corner in its dovish policy outlook.

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