• USD/JPY drops weighed by falling US 10-year bond yields and a soft US Dollar.
• Weaker than expected, China’s data triggered risk aversion, despite easing Covid-19 restrictions.
• US economic data revealed since last Friday suggests the Federal Reserve has work to do.

USD/JPY tumbles as Wall Street closes after hitting a daily high of 137.85 and a low of 136.21, weighed by broad US Dollar (USD) weakness, as China’s economic data threatens to derail the global economic recovery amidst relaxing Covid-19 restrictions. Those factors amongst demand for US Treasuries sent yields tumbling, undermining the USD/JPY. At the time of writing, the USD/JPY is trading at 136.32.

Risk aversion keeps US equities trading with losses. The US Dollar remains soft in the session, blamed on falling US Treasury yields, with the US 10-year benchmark rate plummeting 11 bps to 3.422%. Meanwhile, the US 10s-2s yield curve inverted the most in 40 years, down at -0.842%, a signal of a possible upcoming recession in the United States.

Aside from this, China reported the Balance of Trade for November, which missed expectations, while Exports plunged 8.7% YoY vs. a 3.5% contraction estimated. Concerning the Covid-19 restrictions, Chinese authorities announced that people with Covid can isolate at home if they have mild or no symptoms. Additionally, PCR tests are no longer needed when visiting most venues.

In the meantime, the last two weeks economic data from the United States (US) has proved the economy’s resilience. An upbeat US employment data, wages rising above the 5% threshold, and The US ISM Services PMI exceeding estimates further cemented the case for the 50 bps rate hike by the Federal Reserve. Also, ahead of the Fed’s decision, inflation data from the US would give USD/JPY traders clues regarding the size of the rate hike.

In the Japanese front, the economic docket will feature GDP Growth Rate for Q3, expected to contract 0.3% MoM, while the annual reading is expected to drop 1.1%. Furthermore, the Current Account Balance is estimated to be ¥623.4B

USD/JPY Key Technical Levels