USD/JPY bulls have eyes on 106 handle, but prospects for Fed QE could be hinderous for bulls

• ECB fails to relieve markets of coronavirus panic, euro is offered.
• USD/JPY has rallied on liquidity funding concerns.
• Money markets are showing signs of 2009 style price action. 
• Fed steps into the rescue with large repo market operations., next comes QE.

USD/JPY was firm and knocking on the doors of the 106 handle as markets pile into the US dollar following the market's disappointment with the European Central Bank meeting and due to USD funding risks. At the time of writing, USD/JPY is training at 105.77 having travelled from a low of 103.80 and touched a high of 106.09. However, the dollar just took a knock on QE expectations and the Fed's repo market operations. 

• EUR/USD tumbles to 1.1130 on USD-buying

The European Central Bank and Present Donald Trump's address at 21.00 GMT yesterday has done little to calm market nerves pertaining to the spread of the coronavirus to all corners of the world and prospects of a 2008/09 type of dislocation in global markets.  At the start of the week, it was something brought up in, Forex Today: So much for the dollar's safe haven status?

The Federal Reserve is going to be back in focus

• US: Fed to slash rates back to 0.00%; recession is increasingly highly – Wells Fargo

The Federal Reserve is going to be back in focus at this juncture and QE will be a potential weight on the dollar. However, as pointed out in the said 'Forex Today' article, "the US dollar can snap back, however, on a scramble to the market of dollars considering how short the offshore market is. If we are to see a repeat of the 2007 crisis (a Europan banking crisis for instance) coupled by recessions in other parts of the world and drastic measures taken by central banks, then bulls will grab hold of that lifeline, surely propelling the dollar higher again." 

Money markets have started to show signs of stress ( widening of the EUR cross-currency basis swap) and we are seeing some of this risk already factored into the dollar. The Federal Reserve's 14-day and 25-day repo operations have been over-subscribed and represent a squeeze on dollar funding in an unfilled demand for USD funding. For this reason, the New York Fed id now offering $500 Bln in a three-month repo operation, to settle on March 13, 2020. This is likely one of the last steps towards QE. The Fed started to shrink its balance sheet last year and has plenty of space to grow it back to the peak of 25% of GDP from levels near 19% today.

While there could be some softness in USD/JPY  due to the Fed's meeting next week, the unwinding of the carry trade is likely to continue. Higher yield FX should be pressured and the yen is bound to continue to attract a bid, and the euro also. This should keep USD/JPY anchored as well.