USD/JPY struggles below 136.00 as yields, BOJ chatters join recession, covid woes

• USD/JPY fades bounce off intraday low during the first daily fall in four days.
• US Treasury bond yields recover as China’s covid conditions worse, recession fears escalate.
• BOJ is expected to revise inflation forecasts to the north.
• Second-tier Japan data, US ADP Employment Change could direct intraday moves, risk catalysts are the key.

USD/JPY snaps a three-day uptrend, retreating to 135.70 during Thursday’s Asian session. The yen pair’s latest weakness could be linked to the pullback in the US Treasury yields, as well as hawkish hopes from the Bank of Japan (BOJ) amid a sluggish session. However, fears of recession and covid woes in China keep underpinning the US dollar’s safe-haven demand.

That said, Shanghai recently reported a big jump in the daily covid cases to 32 locally transmitted confirmed cases. The same propels lockdown fears, previously propelled by China’s order of mass testing.

Elsewhere, the Bank of Japan (BOJ) is expected to revise its inflation forecast to the north, which in turn teases the central bank hawks. However, the BOJ turned down any such moves by reiterating its commitment to easy money policies. It should be noted that the Japanese media mentioned that the BOJ is likely to consider lowering its GDP forecast for fiscal 2022.

On a broader front, the yield curve inversion, a condition where near-term bond yields are higher than the longer-dated ones, appears to highlight the recession fears. That said, the 2-year bond coupon retreats to 2.96% while showing the inverse gap with the 10-year yields and hints at the global recession. On the same line, International Monetary Fund (IMF) Managing Director Kristalina Georgieva also said, per Reuters, “Global economic outlook has 'darkened significantly' since last economic update.” the IMF chief also added, “Cannot rule out the possible global recession in 2023.”

It should be noted that the softer US data could be linked to the recently easy US Dollar Index (DXY), down 0.10% around 107.00. The greenback gauge jumped to the highest in 20 years the previous day amid the market’s rush to risk safety. US ISM Services PMI for June dropped to 55.3 versus 55.9 in May. The actual figure, however, came in better than the market expectation of 54.5. It’s worth noting that the US JOLTS Job Opening for May declined to 11.25 million versus 11.00 million expected and 11.68 million prior.

Amid these plays, the US Treasury yields fade the previous day’s recovery from the monthly low whereas the S&P 500 Futures drop 0.20% by the press time.

To sum up, Japan’s preliminary readings of the Coincident Index and Leading Economic Index for June may entertain USD/JPY traders ahead of the US ADP Employment Change for June, expected 200K versus 128K prior. However, major attention will be given to the risk catalysts and yields for clear directions.

Technical analysis

A successful rebound from the two-week-old support line, around 135.00, keeps USD/JPY buyers hopeful of refreshing the multi-year high, currently around 137.00.