Bulls Lose Grip as Japanese Yen Struggles Near Two-Week Low Against USD

Highlights:

• In response to the dismal domestic data, the Japanese Yen is finding fresh supply.
• A tailwind for the USD and the USD/JPY is a rise in US bond yields.
• Anticipation of a hawkish BoJ pivot should help limit any meaningful decline for the JPY.

The Japanese Yen (JPY) is losing traction on Thursday after a rally in the Asian session. It is hovering near a two-week low against the U.S Dollar (USD). Japan’s factory activity contracted at the fastest pace in 10 months in December, according to data released on Thursday. This is proving to be a key factor undermining the JPY, in addition to the devastating 7.6 magnitude earthquake on New Year’s Day. On the other hand, the minutes from the December Federal Reserve meeting offered few clues about when interest rates could begin falling. This causes US Treasury yields to rise modestly and acts as a tailwind for the USD, which is seen as continuing to support the USD/JPY pair.

However, markets have priced in a greater chance of a 25 basis point (bps) Fed rate cut in March. This should put an end to a week-long rally in US Treasury yields. In addition, losses in the domestic currency should be limited by the market’s growing conviction that the Bank of Japan (BoJ) will move away from negative interest rates and its yield curve control (YCC) policy in April, following the annual wage negotiations in March. In addition, the JPY’s relative safe-haven status is likely to be supported by a generally weaker tone in the equity markets. Traders may also refrain from making aggressive directional bets. Instead, they may prefer to stay on the sidelines ahead of Friday’s Nonfarm Payrolls (NFP) report, which will be crucial for the US economy.

JPY/USD continues to slide on the third day of the week 

• Japanese yen’s modest gains from Asian session are erased as domestic data weakens, although a mixed bag is expected to keep losses in check.
• The Bank of Japan’s Jibun Manufacturing PMI remained in contraction territory for the seventh consecutive month, shrinking to 47.9 in December, the weakest reading since February.
• Expectations of a reversal of the policy divergence between the Bank of Japan (BoJ) and the Federal Reserve (Fed) in 2024 should continue to lend some support to the JPY.
• A consensus that inflation is under control and concerns about the risks that an overly restrictive policy could pose to the economy were reflected in the minutes of the December 12-13 FOMC meeting.However, the minutes did not provide any direct clues as to when interest rate cuts might begin, which is seen as a tailwind for US bond yields and the US dollar.
• The Institute for Supply Management (ISM) said on Wednesday: “The pace of decline in the U.S. manufacturing sector slowed amid a modest rebound in production and an improvement in factory employment.
• The U.S. ISM Manufacturing PMI improved to 47.4 last month after being unchanged at 46.7 for two consecutive months, although it remained in contraction territory for the 14th month in a row.
• Separately, job openings fell to 8.79 million in November, the lowest level since March 2021, according to the Labor Department’s Job Openings and Labor Turnover Survey (JOLTS).
• Investors are now looking ahead to the U.S. ADP report. It is expected to show that private sector employers added 115,000 jobs in December, up from 103,000 in the previous month.However, the market’s focus will remain on Friday’s official monthly employment data. This is popularly known as the Nonfarm Payrolls (NFP) report.