Summary:
Yen weakened as the dollar opened the first full week of the new year on a firm footing
USD/JPY pushed back toward the upper end of recent ranges
Rate differentials continue to weigh on the Japanese currency
Markets price more Fed cuts than policymakers currently signal
US data this week likely to help shape near-term FX direction
The Japanese yen underperformed at the start of the first full trading week of the year, slipping back toward recent lows as the US dollar opened on a firm footing across major currency pairs. Dollar strength was evident against the euro and sterling, but the move in USD/JPY was particularly notable, with the pair edging back toward the upper end of its recent range as yield differentials continued to favour the greenback.
The dollar rose to around ¥156.90 ... and above 157.00 as I update .... extending gains against the yen as markets maintained a cautious stance on the near-term outlook for Japanese monetary policy. While the Bank of Japan has taken incremental steps toward policy normalisation, investors remain unconvinced that the pace of tightening will be sufficient to materially support the currency in the short term, particularly against a still-resilient US economy and potential Fed pause.
Dollar strength elsewhere was more modest. The euro slipped toward $1.1705, its weakest level in more than three weeks, while sterling edged lower to around $1.3440. Overall currency moves were contained, though risk sentiment remained sensitive to geopolitical developments following the United States’ high-profile operation in Venezuela over the weekend.
For yen traders, however, macro fundamentals remained, and will remain, the dominant driver. Markets continue to price in one or two interest-rate cuts from the divided Federal Open Market Committee. That gap in expectations has kept US yields elevated relative to Japanese rates, reinforcing downward pressure on the yen.
Attention now turns to a heavy US data calendar that could further influence rate expectations and, by extension, USD/JPY. The week begins with the ISM surveys and culminates in Friday’s non-farm payrolls report, which will be closely watched for confirmation that US labour market momentum is easing in a way that would justify further Fed easing.
Until clearer evidence emerges of a decisive slowdown in US activity, or a more assertive tightening signal from Tokyo, the yen is likely to remain vulnerable. The persistence of wide rate differentials, coupled with global investors’ preference for dollar exposure at the start of the year, suggests that rallies in the Japanese currency may continue to be shallow and short-lived.
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Nikkei update:
