JPY/USD Struggles Near Two-week Lows

The yen lost momentum after rising in Asia on Thursday, with the yen holding near two-week lows against the dollar. Data released on Thursday showed that Japanese factory activity shrank by the most in 10 months in December. This came on the heels of Japan’s devastating 7.6 magnitude earthquake on New Year’s Day and was a key factor weakening the yen. Meanwhile, minutes from the Federal Reserve’s December policy meeting provided few clues as to when it might begin cutting interest rates. This led to a slight rebound in US Treasury yields, which acted as a “tailwind” for the US dollar and thus provided further support for USD/JPY.

However, markets have priced in strong odds of a 25 basis point rate cut by the Federal Reserve in March, which should end a week of gains in U.S. Treasury yields. Additionally, growing confidence that the Bank of Japan (BoJ) will abandon its negative interest rates and yield curve control (YCC) policies in April following annual wage talks in March should help stem the yen’s decline. Separately, broad equity weakness is seen as another factor favoring the yen’s relative safe-haven status. Traders may also avoid making aggressive directional bets and instead stay on the sidelines ahead of Friday’s key U.S. monthly jobs report or non-farm payrolls report.

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