Japanese Yen continues losing traction against USD, bullish potential seems intact

• The Japanese Yen undermines the prevalent risk-on environment and a modest USD recovery.
• Thursday’s upbeat US macro data cast doubts over a March Fed rate cut and benefits the buck.
• The Fed’s dovish pivot and hawkish BoJ expectations cap any meaningful gains for USD/JPY.

The Japanese Yen (JPY) weakens against the US Dollar (USD) during the Asian session on Friday, allowing the USD/JPY pair to build on the overnight bounce from sub-141.00 levels, or its lowest level since July 31. The risk-on rally across the global equity markets remains uninterrupted in the wake of the Federal Reserve's (Fed) dovish pivot and hopes for additional stimulus from China. This, in turn, is seen denting demand for traditional safe-haven assets. Furthermore, a private survey showed that Japan's factory activity shrank for a seventh straight month and undermined the JPY. The USD, on the other hand, recovers further from over a four-month low and remains supported by the upbeat US macro data released on Thursday.

That said, geopolitics remains the biggest risk for the markets, which, along with China's economic woes and speculations that the Bank of Japan (BoJ) may exit its negative rate policy early next year, should limit losses for the JPY. Meanwhile, the markets are now pricing in a nearly 60% chance that the Fed will begin to cut rates at its March meeting and the odds of a May rate cut stand at 90%. This led to the recent sharp decline in the US Treasury bond yields, which might hold back the USD bulls from placing aggressive bets and keep a lid on any meaningful appreciating move for the USD/JPY pair. Traders now look to the flash US PMI prints for some impetus, though the focus will remain on the BoJ policy meeting next week.

Daily Digest Market Movers: Japanese Yen snaps a three-day winning streak against the US Dollar

• The US Census Bureau reported on Thursday that Retail Sales rose 0.3% in November as compared to a 0.1% fall expected, underscoring resilient consumer spending despite higher borrowing costs.
• Moreover, Core Retail Sales, which excludes automobiles, also surpassed consensus estimates for a 0.1% decline and increased by 0.2% last month, while Retail Sales Control Group increased 0.4%.
• A separate report showed that Initial Jobless Claims fell to 202K during the week ended December 9, registering the lowest level since mid-October, and providing evidence of a still strong labor market.
• The upbeat US macro data cast doubts on expectations for an early interest rate cut by the Federal Reserve, as early as March 2024, forcing traders to take some profits off their US Dollar bearish bets.
• The au Jibun Bank flash Japan Manufacturing PMI shrank for the seventh straight month and dropped from 48.3 previous to 47.7 in December, marking the fastest deterioration in 10 months.
• The au Jibun Bank flash Services PMI recorded the fastest gain in three months and expanded to 52.0 in December from 50.8 previous, while the composite PMI expanded slightly to 50.4 from 49.6.
• Meanwhile, the prevalent risk-on environment is seen undermining the safe-haven Japanese Yen, though expectations for a shift in the Bank of Japan's policy stance should help limit further losses.
• The benchmark 10-year US government bond yield remains below 4% or its lowest level since August, and the yield on the rate-sensitive two-year Treasury note languishes near its weakest level since July.
• The resultant narrowing of the US-Japan rate differential, along with the divergent Fed-BoJ policy expectations, might continue to act as a tailwind for the JPY and cap gains for the USD/JPY pair.

Technical Analysis: USD/JPY remains vulnerable, the key 200-day SMA support breakdown in play

From a technical perspective, the Relative Strength Index (RSI) on the daily chart is still holding in the oversold territory and prompts some short-covering on the last day of the week. That said, the overnight sustained break and acceptance below the 200-day Simple Moving Average (SMA) favours bearish traders. Hence, any subsequent move back above the said support breakpoint, turned resistance, currently around mid-142.00s, might still be seen as a selling opportunity near the 142.75-142.80 region. This, in turn, should cap the USD/JPY pair near the 143.00 round figure. That said, a sustained strength beyond the latter could allow spot prices to reclaim the 144.00 mark.

On the flip side, the 142.00 round figure now seems to protect the immediate downside ahead of the 141.40-141.35 region. Some follow-through selling might expose the multi-month low, around the 140.95 area touched on Thursday, below which the USD/JPY pair is likely to accelerate the downfall further towards the 140.00 psychological mark.