USD/JPY drops under 128.00 with yen outperforming amid risk-off flows, commodity weakness, lower yields

• USD/JPY has dropped back under 128.00 with the yen outperforming in the G10.
• The yen is benefitting from a bullish combination of risk-off flows, lower commodities and lower global bond yields.
• Ahead, US GDP and Core PCE plus the BoJ’s policy announcement will be the major risk events of the week.

The yen has thus far this week enjoyed some rare time as the best performing of the major G10 currencies, and was last trading up about 0.6% versus the buck, and with much larger gains against some of its risk-sensitive G10 counterparts. The Japanese currency on Monday took advantage of a combination of yen bullish factors including 1) risk-off flows in risk assets which spurred demand for safe-haven currencies, 2) downside in global yields which saw rate differentials to Japan shrink, boosting the low-yielding yen’s investment appeal and 3) a sharp drop in global commodities, which out to boost the terms of trade of the heavily commodity import-dependent Japanese economy.

USD/JPY was last trading in the upper 127.00s, now more than 1.25% below last week’s peaks above 129.00, and is eyeing a push lower towards support in the 125.00 area. Should the trends of weaker equities and commodities plus lower yields continue this week, then USD/JPY should have a decent chance of testing this support, which also happens to coincide with the pair’s 21-Day Moving Average. The main driver of these trends at the start of the week has been the news out of China of tighter lockdowns in Shanghai and Covid-19 cases being picked up in Beijing, which has triggered fears of wider lockdowns across the country.

This will be a key theme in the week ahead, but USD/JPY traders should keep an eye on the economic calendar. The BoJ will be setting monetary policy on Thursday and expectations for it to reiterate its ultra-dovish policy stance pose a risk to the nascent yen comeback. The first estimate of US Q1 GDP figures on Thursday followed by March Core PCE inflation on Friday will also keep markets thinking about the outlook for the US economy and for Fed policy, even though the Fed will be quiet given blackout ahead of its policy meeting in the first week of May.