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Overall risk aversion pushed the yen to the top of the forex pile last week. Will we see a retracement or extension of the moves this week?

Japan’s trade data (Aug 15, 11:50 pm GMT)

Japan’s trade numbers don’t usually cause sustained price action for the yen, but traders might get a pip or two (or fifty) with this week’s trade numbers.

See, last week’s strong GDP release was tempered by expectations that (a) it won’t change the BOJ’s dovish forward guidance and (b) Japan’s potential trade conflict with the U.S. will drag on growth down the road.

A better-than-expected report could push the yen higher against its counterparts, while disappointing numbers would support the BOJ’s push for a longer period of easy monetary policies and help limit the yen’s gains.

Overall risk sentiment

With not a lot of top-tier data from Japan, it’s likely that the yen will once again take cues from global bond yields and markets’ risk appetite.

This week all eyes will be on the U.S. to see if it will respond to China’s tit-for-tat tariff plans by printing ANOTHER list of Chinese goods to place duties on.

Oh, and don’t forget about other economic concerns! The dramatic decline of the Turkish lira has already spurred contagion fears in the Asian markets.

Meanwhile, last week’s brouhaha over the Russian rouble has led Russia’s Finance Minister to reveal that Russia will further decrease its investment in the U.S. economy and securities. Yipes!

Last Week’s Price Review

The yen is currently leading the forex pack (as of 8 am GMT), which is a nice comeback after last week’s poor performance ended its two-week winning streak.

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

The yen appears to have been taking directional cues from bond yields this week. However, risk sentiment also had an apparent effect on the yen’s price action.

And an example of this is when bond yields fell on Monday, but the yen had a hard time attracting buyers, likely because of the risk-on vibes on Monday.

Also, risk aversion was pretty much the dominant sentiment on Wednesday (and Thursday and Friday for that matter), which is likely why the yen was taking ground from its peers before bond yields eventually turned lower.

Aside from risk sentiment and bond yields, it’s also very likely that demand for the yen was ever present because of BOJ-related speculation.

You see, Reuters released a report on Monday, which claimed that “there were plans to raise rates twice this year.”

And the tip of the spear for a more hawkish monetary policy stance is supposedly BOJ Deputy Governor Masayoshi Amamiya, BOJ Shogun Kuroda’s second-in-command and one of the architects of the BOJ’s super loose monetary policy.

The Reuters report also went on to cite an unnamed source as saying that “The reflationists have become a minority, which means the BOJ is turning more hawkish.”

At any rate, dip demand for the yen became noticeable throughout the week after the Reuters report was released.

In fact, I even pointed out during Wednesday’s London session recap that some market analysts were still attributing the steady demand for the yen to that Reuters report.