- Japanese Yen continues its recovery into the weekend on potential for divergent monetary policy.
- BoJ has started normalizing policy as other central banks are close to reaching the end of their tightening cycles.
- USD/JPY declines sharply after Nonfarm Payrolls miss brings into doubt further Fed rate hikes.
The Japanese Yen (JPY) is holding onto its gains against the US Dollar on Friday afternoon, with the USD/JPY pair near 149.40 after declining 0.7% in the session. The pair is still off its intraday low of 149.18 though. US Nonfarm Payrolls (NFP) for October gained 150K, much lower than expectations and inducing weakness in the Greenback. US Treasury yields dropped precipitously on the news.
The Yen trades higher in most pairs at the end of the week after recovering from oversold conditions following the dramatic post-Bank of Japan (BoJ) meeting sell-off on Tuesday.
The Yen may be benefiting from the market view that the BoJ will eventually normalize its ultra-loose monetary policy stance at a time when most other central banks are expected to be ending their tightening cycles.
Permanently negative interest rates in Japan have kept the Yen weak vis-a-vis other currencies, whose central banks have been raising interest rates to combat inflation. Investors tend to park their capital where it can manifest the highest risk-free returns, putting the Yen at a severe disadvantage. With most major central banks now having reached peak interest rates, however, the tables could turn if the BoJ starts tightening.
At the last BoJ meeting, the board of governors made a first step towards tightening or normalizing policy, when it relaxed its cap on 10-year Japanese Government Bond (JGB) yields, essentially a form of quantitative easing.
The reason the Yen still sold-off after the meeting, however, was because Bank of Japan Governor Kazuo Ueda remarked that most inflation was still coming from higher commodity prices rather than increased demand, suggesting the BoJ would need to keep interest rates lower for longer.
Daily digest market movers: Yen recovers on divergent monetary policy outlook
- The Yen continues to recover against most majors into the weekend as market perceptions see the potential for policy divergence between BoJ and other major central banks.
- The BoJ could start raising rates at a time when the other central banks are reaching their peak interest rates or lowering them, which would provide the perfect monetary policy differential for a period of dramatic strengthening for the Japanese currency.
- On Friday, the Yen gains the most against the US Dollar (USD), after the release of the October Nonfarm Payrolls report leads traders to offload the Dollar.
- The report shows a weakening of most labor metrics in October, further adding weight to the view that the Federal Reserve (Fed) is now done with raising interest rates.
- Payrolls themselves rose by only 150K versus the 180K forecast, and way below the 297K (itself revised down from 336K) of the previous month.
- Average Earnings rose by only 0.2% MoM versus the 0.3% expected, Average Weekly Hours worked fell to 34.3 from 34.4, and the Unemployment Rate rose to 3.9% from 3.8% expected and the same previously.
- The Yen is hampered by a lack of demand-driven inflation. BoJ Governor Ueda said inflation is mainly due to rising input costs due to higher commodity prices, especially Oil, rather than being “demand driven”.
- His comments suggest the BoJ will need to continue to maintain easy monetary policy for longer than had been hoped to inject growth into the economy, rather than to start to hike rates.
- The Yen is further hampered by a disconnect between the actions of the BoJ and its rhetoric. Despite changing the 1.0% JGB yield cap to a reference point for intervention rather than a hard ceiling, the BoJ still intervened midweek to cap rising yields as they inched closer to the 1.0% mark, basically continuing to treat the level as a ceiling, according to a report by Reuters.
Japanese Yen technical analysis: USD/JPY short-term uptrend at risk of reversing
USD/JPY – the amount of Yen that one Dollar buys – sank after the release of lackluster Nonfarm Payrolls led to mass ditching of the Dollar.
From a short-term perspective the decline brings the pair perilously close to a trend reversal. A break below the 148.80 low of October 30 would provide much stronger evidence of bears finally turning the tables on bulls, as it is the last major lower high of the short-term uptrend.
US Dollar vs Japanese Yen: 4-hour Chart
There are further signs of weakness: the pair has cleanly broken out the rising channel it has been in – disrespecting for the second time this week, the lower boundary line.
It has cut straight through the 50 and 100-four hour Simple Moving Averages (SMA) and is challenging the 200.
US Dollar vs Japanese Yen: Daily Chart
On the daily chart, which measures the medium-term trend, the uptrend still looks solid, except for the channel breakout. The 148.80 lows is still the level to watch and if it is not broken bulls will continue to hold out hope of a recovery. Apart from that, the next major support level is the 50-day SMA at 148.63.
The Moving Average Convergence Divergence (MACD) indicator has been showing bearish divergence for some time, as it has been falling whilst price was rising during the last days of October. Nevertheless, this is not sufficient on its own to suggest the medium-term uptrend has reversed.
Ultimately the “trend is your friend..” as the saying goes, and for USD/JPY the short, medium and long-term trends are all still bullish, suggesting the odds continue to favor more upside eventually.
If the 151.93 32-year-high of 2022 is breached, the uptrend will be reconfirmed, with next targets expected to be met at the round number marks – 153.00, 154.00, 155.00 etc.
Nonfarm Payrolls FAQs
Nonfarm Payrolls (NFP) are part of the US Bureau of Labor Statistics monthly jobs report. The Nonfarm Payrolls component specifically measures the change in the number of people employed in the US during the previous month, excluding the farming industry.
The Nonfarm Payrolls figure can influence the decisions of the Federal Reserve by providing a measure of how successfully the Fed is meeting its mandate of fostering full employment and 2% inflation.
A relatively high NFP figure means more people are in employment, earning more money and therefore probably spending more. A relatively low Nonfarm Payrolls’ result, on the either hand, could mean people are struggling to find work.
The Fed will typically raise interest rates to combat high inflation triggered by low unemployment, and lower them to stimulate a stagnant labor market.
Nonfarm Payrolls generally have a positive correlation with the US Dollar. This means when payrolls’ figures come out higher-than-expected the USD tends to rally and vice versa when they are lower.
NFPs influence the US Dollar by virtue of their impact on inflation, monetary policy expectations and interest rates. A higher NFP usually means the Federal Reserve will be more tight in its monetary policy, supporting the USD.
Nonfarm Payrolls are generally negatively-correlated with the price of Gold. This means a higher-than-expected payrolls’ figure will have a depressing effect on the Gold price and vice versa.
Higher NFP generally has a positive effect on the value of the USD, and like most major commodities Gold is priced in US Dollars. If the USD gains in value, therefore, it requires less Dollars to buy an ounce of Gold.
Also, higher interest rates (typically helped higher NFPs) also lessen the attractiveness of Gold as an investment compared to staying in cash, where the money will at least earn interest.
Nonfarm Payrolls is only one component within a bigger jobs report and it can be overshadowed by the other components.
At times, when NFP come out higher-than-forecast, but the Average Weekly Earnings is lower than expected, the market has ignored the potentially inflationary effect of the headline result and interpreted the fall in earnings as deflationary.
The Participation Rate and the Average Weekly Hours components can also influence the market reaction, but only in seldom events like the “Great Resignation” or the Global Financial Crisis.