The yen gained strong momentum amid a risk-averse tone. USD/JPY dipped to its 8-month lows at 105.25 on Friday, and the yen has maintained a robust tone as a Tokyo market holiday limited activity. USD/JPY has now re-tested the 105.25 level.

EUR/JPY has broken below 118.00 for lows around 117.60, the weakest level since April 2017.

Confidence in the global growth outlook has continued to weaken amid an increase in trade tensions following President Trump's move to put tariffs on all remaining Chinese exports from September 1^st. The yen will continue its uptrend in the short term as risk appetite remains extremely fragile.

US Treasuries gained ground on Monday with the 10-year yield declining almost by 1.70%.

Market expectations of the further Fed Funds rate cuts this year are increasing. Futures markets are indicating an 87% chance of at least two further rate cuts by the end of 2019.

The Bank of Japan will maintain a very expansionary monetary policy, but there are major limits to further easing. In relative terms, Japanese yields increased, especially given the German yields at record lows.

CFTC data recorded a significant net increase in long, non-commercial yen positions for the latest week to over 10,000 contracts. This was the first long position for over 13 months and highest since November 2016.

Therefore, short positions on the yen will be less likely to be reduced.

Political factors will remain important. Short-term fears will increase, especially as the weaker Chinese yuan will undermine Japan's competitiveness.

Intervention is an important weapon, but there will certainly be a cautious stance in the short term given the on-going issue of relations with the US. Aggressive intervention by the Japanese Finance Ministry (MOF) to weaken the yen would risk a hostile reaction from President Trump and the US Administration. Japan might also be accused of currency manipulation, and the MOF is likely to be tentative and choose their battles carefully.

The USD/JPY pair's break below 105.00 would risk stop-loss dollar selling, but there will be strong support around March 2018 lows just above 104.60.