Yen Weakens Amid Risk Aversion and Economic Data Expectations

The Japanese Yen is facing difficulties today, even as risk aversion dominates the sentiment across Asian markets. The Nikkei index has continued its decline after briefly surpassing the psychological 40,000 mark last week, indicating that the recent rally was not sustainable for investors. Additionally, the December PMI Services data has shown only marginal growth, which has not provided any significant boost to the overall economy.

In a related note, Bank of Japan (BoJ) Governor Kazuo Ueda has reiterated a cautious stance regarding monetary policy, without providing any clear indications of an imminent rate hike. It appears that the recent recovery of the Yen may be short-lived.

Meanwhile, commodity currencies have emerged as the strongest performers today, maintaining their resilience from last week. However, these gains are not accompanied by considerable momentum, demonstrating a sense of prudence in the market. The Euro and British Sterling are trading mixed, stabilizing after last week’s notable losses. In contrast, the US Dollar, Yen, and Swiss Franc have underperformed, with the Yen being notably the weakest currency.

As markets look forward to a critical week, a series of high-impact economic data is on the horizon. The focus will be on the US Non-Farm Payrolls and ISM Services data, which are likely to shape the outlook for the Dollar, especially as expectations for a pause in the Federal Reserve's easing cycle have firmly taken hold. Additionally, inflation data from the Eurozone, Switzerland, and Australia is anticipated to draw significant attention, influencing the monetary policies of the European Central Bank (ECB), Swiss National Bank (SNB), and Reserve Bank of Australia (RBA). Moreover, Canada's employment figures will test the resilience of the Canadian Dollar, which showed strong performance last month but has recently displayed signs of diminishing momentum.

From a technical perspective, the AUD/CAD pair has broken the medium-term rising channel, suggesting that the corrective rally from 0.8562 has reached its peak at 0.9375. A decisive break below the 0.8851 support level would strengthen the bearish outlook for the pair. Conversely, a strong rebound from current levels, followed by a sustained break of the 55-day exponential moving average (currently at 0.9060), would keep the uptrend in play. The upcoming CPI data from Australia and employment statistics from Canada will be crucial in determining the next significant movement for this currency pair.

Market Performance in Asia

In Asian markets, the Nikkei index has fallen by 1.47%. The Hang Seng index in Hong Kong is down 0.46%. The Shanghai Composite in China has also seen a slight decline of 0.14%, while Singapore’s Straits Times index has gained 0.27%. Additionally, the yield on Japan's 10-year government bonds has risen to 1.129%.

Caution from BoJ Governor

In remarks at a Japanese Bankers Association event, BoJ Governor Kazuo Ueda expressed a cautious approach regarding potential monetary policy changes. He stated that any adjustments to interest rates would depend on sustained improvements in economic conditions and inflation outcomes.

"Our position is that we will adjust the policy interest rate to reduce the extent of monetary easing if economic and price conditions continue to improve," Ueda stated. However, he emphasized the necessity for vigilance regarding various risks, implying that the timing of any changes would be carefully considered. He also mentioned his hopes for a balanced growth between wages and prices in the coming year.

Japan's PMI Services Data

Japan’s service sector experienced slight improvement in December, with the final PMI Services index rising to 50.9 from 50.5 in November, indicating only marginal growth. The composite PMI also increased to 50.5 from 50.1, reflecting modest stabilization in the overall economy.

Usamah Bhatti, an economist at S&P Global Market Intelligence, mentioned that the December data showed continued increases in business activity and new business, with new orders expanding at the fastest pace in four months. Employment in the service sector has risen for the fifteenth consecutive month, signaling steady gains in the labor market. However, despite these improvements, business optimism has slightly diminished.

China's Services Sector and Broader Economic Strain

In China, the services sector gained momentum in December, marked by the Caixin PMI Services rising to 52.2 from 51.5 in November, its highest level since May. However, the overall economic environment remains mixed, as the composite PMI fell to 51.4, the lowest since September. This discrepancy indicates that while services are growing rapidly, they are not enough to counterbalance the slowdown in the manufacturing sector.

Wang Zhe, a senior economist at Caixin Insight Group, noted that significant downward pressures persist due to weak domestic demand and growing adverse external factors. He pointed out that sluggish employment and declining profit margins are negatively impacting market sentiment. Recent declines in some of the manufacturing PMI survey indicators suggest that more time is needed to evaluate the consistency and effectiveness of the recent policy measures.

Upcoming Jobs and Inflation Data

As global markets enter the first full trading week of 2025, the economic calendar is filled with key events. In particular, US Non-Farm Payrolls and ISM Services data are set to take center stage. Expectations for the Fed to pause its easing cycle this month are strengthening, and unless there are extraordinarily negative developments, the data is not expected to alter this view significantly. Furthermore, the FOMC minutes from December, also due this week, could provide additional insights regarding policymakers' risk assessments and their rationale for the anticipated policy direction.

Inflation data will be closely watched, with releases from the Eurozone, Switzerland, and Australia. Eurozone inflation is expected to experience a slight increase as the effects of energy prices stabilize, but this is not anticipated to disrupt the ECB's slow approach to rate changes. The ECB is still projected to implement rate cuts in January. In Switzerland, inflation is predicted to remain steady at below 1%, reinforcing the case for the SNB to continue reducing rates later in the year.

In Australia's case, the inflation outlook is less straightforward. While many anticipate the RBA to start rate cuts by May, stable monthly CPI around 2% could lead to arguments for a potential earlier decision in February. Ultimately, the broader direction depends on the upcoming quarterly inflation report due this month.

Japan's reports on cash earnings and household spending will provide insights into the domestic economy; however, global uncertainties—especially concerning US economic conditions—may compel the BoJ to maintain its cautious wait-and-see approach despite strong data.

Canada's employment report will be a significant indicator of the Bank of Canada's (BoC) monetary policy stance. The BoC has indicated a slowdown in its easing pace this year, but the health of the labor market—along with any signs of resilience—will heavily influence the depth of its ongoing rate-cutting cycle.

Key Economic Events This Week

Below are some key economic events to watch for this week:

• Monday: China Caixin PMI services; Swiss retail sales; Eurozone PMI services final, Sentix investor confidence; UK PMI services final; US PMI services final, factory orders.
• Tuesday: Japan monetary base; Australia building permits; Swiss CPI, foreign currency reserves; UK PMI construction; Eurozone CPI flash, unemployment rate; Canada trade balance, Ivey PMI; US trade balance, ISM services.
• Wednesday: Australia monthly CPI; Japan consumer confidence; Germany factory orders, retail sales; Eurozone PPI; US ADP employment, jobless claims, FOMC minutes.
• Thursday: Japan average cash earnings; Australia retail sales, goods trade balance; China CPI, PPI; Germany industrial production, trade balance; Eurozone retail sales.
• Friday: Japan household spending; Swiss unemployment rate; France consumer spending, industrial production; Canada employment; US non-farm payrolls, U of Michigan consumer sentiment.

GBP/JPY Daily Outlook

As for the GBP/JPY currency pair, it has made notable recovery today but remains within a range below 198.94, with the intraday bias appearing neutral. The outlook indicates that the corrective pattern from 180.00 is still extending. Further movement upwards is favored, provided that the 194.04 minor support level holds. A breakthrough above 199.79 would aim for resistance currently set at a channel (now at 203.90). However, a firm break below 194.04 would shift the bias towards the downside, targeting 188.07 support instead.

Yen, Markets, Risk