USD/JPY moves further away from multi-year tops, slips below 114.00

• USD/JPY edged lower for the second successive day amid reviving safe-haven demand.
• Renewed worries about China’s property sector extended support to the safe-haven JPY.
• Elevated US bond yields underpinned the USD and might help limit losses for the major.

A modest pickup in demand for the safe-haven JPY dragged the USD/JPY pair back closer to weekly lows, just below the 114.00 mark during the first half of the trading action on Thursday.

The pair extended the overnight retracement slide from the 114.70 region, or near four-year tops and edged lower for the second successive day. Investors turned cautious amid fresh worries about a credit crunch in China's real estate sector. This, in turn, drove some haven flows towards the Japanese yen and acted as a headwind for the USD/JPY pair.

The heavily indebted China Evergrande Group said on Wednesday that a $2.6 billion deal to sell the controlling stake in its property management business failed. The development raised concerns that the troubled property giant could officially go into default following the expiry of a 30-day grace period to make a dollar bond coupon payment over the weekend.

The market reaction, so far, has been limited amid reports that Evergrande has won a more than a three-month extension to the maturity of a $260 million bond. Moreover, Chinese officials that the trouble in the sector would not be allowed to escalate into a full-blown crisis. This, along with a modest US dollar rebound, might help limit losses for the USD/JPY pair.

The USD drew some support from elevated US Treasury bond yields, though lacked bullish conviction amid moderation of Fed rate hike expectations. This week's dismal US macro releases – Industrial Production and housing market data – pointed to weakening economic activity and forced investors to trim their bets for an early policy tightening by the US central bank.

This was further reinforced by the overnight comments from Fed Governor Randal Quarles, saying that that it would be premature to start raising interest rates in the face of high inflation that is likely to recede next year. Quarles, however, reaffirmed that it is time for the Fed to begin dialling down its massive pandemic-era bond-buying program.

Given the recent strong rally witnessed over the past one month or so, the mixed fundamental backdrop turned out to be a key factor that prompted traders to lighten their bullish bets. That said, it will still be prudent to wait for a strong follow-through selling before confirming that the USD/JPY pair has topped out and placing aggressive bearish bets.

Market participants now look forward to the US economic docket – featuring the releases of the Philly Fed Manufacturing Index and the usual Weekly Initial Jobless Claims. This, along with a scheduled speech by Fed Governor Christopher Waller and the US bond yields, might influence the USD. Traders will further take cues from the broader market risk sentiment to grab some short-term opportunities around the USD/JPY pair.

Technical levels to watch