USD / JPY extends pullback from multi-year highs and dips below 114.00

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  • USD / JPY is moving lower for the second day in a row amid revival in safe haven demand.
  • Renewed concerns about China’s real estate sector support the safe-haven JPY.
  • High US bond yields benefit the USD and could help limit the pair’s losses.

A modest pickup in safe-haven JPY demand has dragged the pair down USD/JPY again near weekly lows, just below the 114.00 level during the first half of the trading action on Thursday. At the time of writing, the pair is trading around 114.05, having set a low near 113.90.

The pair has extended the previous day’s retracement drop from the 114.70 region, close to four-year highs, and has moved lower for the second day in a row. Investors have grown wary amid new concerns about a credit crunch in China’s real estate sector. This, in turn, has led to some safe-haven money flows into the Japanese yen and acted as a headwind for the USD / JPY pair.

The heavily indebted Evergrande Group China said on Wednesday that a $ 2.6 billion deal to sell a controlling stake in its real estate management business fell through. The development raised concerns that the beleaguered real estate giant could officially go into default after the expiration of a 30-day grace period to make a dollar bond coupon payment over the weekend.

Market reaction, so far, has been limited amid news that Evergrande has achieved an extension of more than three months to the maturity of a $ 260 million bond. Furthermore, Chinese officials said the problems in the sector would not be allowed to escalate into a full-blown crisis. This, coupled with a modest rally in the US dollar, could help limit losses for the USD / JPY pair.

The dollar has drawn some support from high yields on US Treasuries, although it lacks bullish conviction amid easing expectations of a Fed rate hike. This week’s dismal US macroeconomic data (industrial production and housing market data) have pointed to weakening economic activity and they have forced investors to lower their expectations for an early tightening of monetary policies by the US central bank.

This has been reinforced by comments the day before from Fed Governor Randal Quarles, saying that it would be premature to start raising interest rates given the high inflation that is likely to recede next year. Quarles, however, reaffirmed that it is time for the Fed to start pulling its massive bond-buying program from the pandemic era.

Given the recent strong bullish movement witnessed in the last month, the mixed fundamental backdrop has turned out to be a key factor leading investors to lighten their bullish positions. That said, it will still be prudent to wait for a strong continuation sell before confirming that the USD / JPY has peaked and thus begin to open aggressive bearish positions.

Market participants are now awaiting the US economic calendar, which includes the Philadelphia Fed Manufacturing Index releases and initial weekly jobless claims. This, coupled with a timed speech by Fed Governor Christopher Waller and US bond yields, could sway the dollar. Investors will take cues from the broader market risk sentiment to seize some short-term opportunities around the USD / JPY pair.

USD / JPY technical levels

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