The yen fell against the dollar for the sixth consecutive day.
Expectations that the Bank of Japan will keep interest rates steady this week continue to weigh on the yen.
High U.S. Treasury yields help drive flows to the low-yielding yen.
The yen struggled to maintain a small upward momentum in Asia on Monday, with the yen hitting a three-week low against the dollar. Japan's core machinery orders and flash Manufacturing PMI were both better than expected, but the initial market reaction was short-lived amid growing expectations that the Bank of Japan (BoJ) will not raise interest rates later this week. In addition, bets that the Federal Reserve will be less dovish remain supportive of higher U.S. Treasury yields and serve as another factor weighing on the low-yielding yen.
Nevertheless, continued geopolitical risks from the protracted Russia-Ukraine war and ongoing conflicts in the Middle East, as well as concerns about U.S. President-elect Donald Trump's tariff plans, may limit the safe-haven yen's decline. Traders may also avoid making aggressive directional bets and instead eagerly watch the key central bank event risks this week. The Fed is due to announce its decision at the end of a two-day meeting on Wednesday, ahead of a key Bank of Japan meeting on Thursday that will help determine the yen's next directional move.
Japan's core machinery orders rose 2.1% in October, up a strong 5.6% from a year earlier, government data showed earlier on Monday. The Nikkei Bank manufacturing PMI rose to 49.5 in December, but remained in contraction for the seventh straight month. Meanwhile, the services PMI rose to 51.4 in December from 50.5, and the composite PMI rose to 50.8 from 50.1 in November. Earlier, the Bank of Japan's tankan survey released on Friday showed that business sentiment in Japan's large manufacturing sector improved in the three months to December. In addition, expectations that Japanese consumer prices will remain above the Bank of Japan's 2% target, moderate economic expansion and rising wages all give the Bank of Japan reason to raise interest rates. However, investors remain skeptical about the Bank of Japan's intention to tighten monetary policy further, which continued to weigh on the yen on Monday. The 10-year Treasury yield rose to a three-week high on Friday as bets grew that the Federal Reserve would take a cautious stance on rate cuts. Traders are pricing in a more than 93% chance that the U.S. central bank will cut borrowing costs again by 25 basis points on Wednesday, according to the CME FedWatch tool. However, signs that the Fed's progress in bringing inflation down to its 2% target has stalled raise the possibility of a slower pace of rate cuts next year. U.S. economic data on Monday includes the release of flash purchasing managers' indexes for manufacturing and services, and later the Empire State Manufacturing Index. Still, market focus remains on this week's crucial Fed and Bank of Japan meetings, which will help determine the near-term direction of the USD/JPY pair.
From a technical perspective, a sustained move higher and a break above the 61.8% Fibonacci level of the November-December decline from multi-month highs could be seen as a new trigger for bulls. Moreover, daily oscillators have just begun to gain bearish momentum, suggesting that the path of least resistance for the USD/JPY pair remains to the upside. As such, some follow-through strength towards the 155.00 psychological level seems likely as USD/JPY approaches the next resistance, around the 154.55 area.
On the other hand, the Asian session lows around 153.35-153.30 currently appear to be strong immediate support ahead of the 153.00 mark. A clear break below the 153.00 level would then test the very important 200-day moving average (SMA) key support around 152.10-152.00. A clear break below this level would reverse the bearish bias in USD/JPY and push the pair towards the 151.00 round number and then towards the 150.00 psychological level.
The yen is one of the most traded currencies in the world. Its value is roughly determined by the performance of the Japanese economy, but more specifically by factors such as the Bank of Japan's monetary policy, the yield spread between Japanese and US bonds, or risk sentiment among traders.
One of the Bank of Japan's tasks is to control the currency, so the Bank of Japan's policy moves are crucial for the yen. The Bank of Japan sometimes intervenes directly in the currency market, generally to weaken the yen, but it usually does not do so due to political concerns about major trading partners. The Bank of Japan's current ultra-loose monetary policy is based on massive stimulus to the economy, causing the yen to depreciate against major currencies. Recently, this process has been exacerbated by the growing policy divergence between the Bank of Japan and other major central banks, which have chosen to significantly increase interest rates to fight decades of high inflation levels.
The Bank of Japan's adherence to its ultra-loose monetary policy stance has led to a widening policy divergence with other central banks, particularly the U.S. Federal Reserve. This has supported the widening spread between 10-year U.S. and Japanese bonds, favoring USD/JPY.
The yen is often viewed as a safe-haven investment. This means that during times of market stress, investors prefer to put money into the yen due to its so-called reliable and stable characteristics. During turbulent times, the value of the yen may rise relative to other currencies that are viewed as riskier investments.