The pre-Fed yen rally has not shifted bearish sentiment.

The Japanese currency is garnering support from dollar position-squaring, EUR/JPY sales, higher one-year yen volatility and lower Treasury yields ahead of an expected Fed rate cut.

The drop in yields is being attributed to everything from a technical retracement in 10-year Treasuries, less concern about government spending under President-elect Donald Trump and speculation about Fed Chair Jerome Powell’s language at Thursday’s press conference.

USD/JPY has shed more than half the gains attributed to U.S. election results, breaking through various support levels. These include a prior double-top at 153.87/88, a 38.2% Fibonacci support level at 153.41 and the Nov. 1 high of 153.09.

Some see further downside, anticipating more verbal intervention on FX from Japanese officials and possibility of a Chinese spending package supporting the yuan.

There is also a question about the level of Japanese investor demand for U.S. Treasuries given elevated price and currency risks after the U.S election outcome. The Fed’s weekly report on foreign custody holdings and the international flow data from the Japanese Ministry of Finance will provide a pre-election window into this demand.

Despite these developments, dip-buying USD/JPY may remain the preferred course of action for some traders on expectations the dollar will recover and the yen will fall victim of haven-related selling as U.S. shares advance.

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(Robert Fullem is a Reuters market analyst. The views expressed are his own.)

((robert.fullem@thomsonreuters.com;))