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The yen marked its second week of losses last week despite the additional tariffs announced by China and the U.S. Will the low-yielding currency continue to take cues from bond yields this week?

Overall risk sentiment

There’s a short list of economic reports scheduled from Japan this week and, unless they present significant hits or misses or traders are particularly bored around the time of the releases, it’s likely that the yen will have muted reactions to the reports.

See, much like the other Asian currencies, the yen shrugged off economic releases in favor of dancing to the tune of risk sentiment. In the yen’s case, it was traders’ appetite for bonds that dictated its intraweek moves.

This week pay close attention to the standoff between China and the U.S. Specifically, watch out for their next steps after announcing their tariff plans. If one of them decides to push the button and actually implement them, or if they find even more products to tax, then we’ll probably see risk sentiment dip lower and the yen pushed higher.

Last Week’s Price Review

With plenty of headlines about trades war and such, you’d think that the yen would end up being the top-performing currency of the week. However, the opposite holds true since the yen is currently the worst-performing currency of the week (as of 8 am GMT).

And if the yen’s ranking doesn’t improve by the end of the week, then this will mark the second straight week of broad-based weakness on the yen’s part.

Overlay of Inverted JPY Pairs & US10Y Bond Yield (Black Line): 1-Hour Forex Chart
Overlay of Inverted JPY Pairs & US10Y Bond Yield (Black Line): 1-Hour Forex Chart

Looking at the chart above, we can see that yen pairs were marching in step with bond yields, so the yen was apparently taking directional cues from bond yields (as usual).

In fact, the only time yen pair decoupled from bond yields is when bond yields rose at the start of the trading week. Market analysts couldn’t pinpoint a reason for that rise in bond yields, though.

At any rate, the yen did track bond yields lower when risk aversion intensified during the U.S. session, stoking safe-haven demand for bonds, market analysts say.

After that, the yen weakened across the board on Tuesday when bond yields rose as risk appetite got revived.

However, risk aversion made a comeback on Wednesday, especially after China announced that they’ll reciprocate Trump’s tariffs by slapping tariffs on 106 U.S. goods to tune of $50 billion.

That fueled safe-haven demand for bonds once more, causing bond yields to slide. It’s even likely that some of those safe-haven flows made their way to the yen since China’s announcement had a direct impact on the yen’s price action.

Bond yields would recover later, though, thanks to recovering risk sentiment and net positive U.S. data, market analysts said. And so the yen was forced to retreat again.

Moving on, risk-taking continued to dominate on Thursday, so bond yields continued to rise while the yen continued to tread water.

The yen finally caught a break when risk aversion returned and bond yields fell once more after Trump announced that he wanted an additional $100 billion worth of tariffs against China.

Bond yields resumed their rise after the initial drop, though, and so the yen was forced to step back again even though risk aversion persisted.