Well, it’s back to the drawing board it would seem for USD/JPY. The currency pair took a big tumble on Friday as the dollar fell hard following the softer US jobs report. In case you missed it: US July non-farm payrolls -23K vs +80K expected
The headline non-farm payrolls estimate was poor but owes quite a bit to a huge drop in government jobs. As mentioned in the run up to the report, it was definitely a potential factor that could stand out – and it did.
“Some analysts are pointing to potential for a modest drag from government payrolls this month. This comes after an uptick in government hiring in May – linked to poll worker hiring for primary elections – with some retention seen during June.”
Besides that, there wasn’t any boost from the World Cup on leisure and hospitality jobs once again. Instead, it reflected another decline as it did back in June. The only positive was that the unemployment rate ticked lower but that comes as the participation rate also fell slightly again. Meanwhile, wage pressures cooled and that is enough to see markets pull back on Fed pricing for September.
Circling back to USD/JPY, the pair fell from 158.30 to around 156.70 in the aftermath before a modest recovery. It still closed Friday lower at around 157.75 but is now making its way back up to 158.20 levels again.
[USD/JPY hourly chart]
So, what’s next for USD/JPY?
All eyes now turn towards the main event this week, which is the US CPI report for July.
At this stage, it seems that anything less than a hot report will likely see markets pare back further on odds of a September rate hike. And that is likely to help keep a lid on any major dollar upside.
But in the context of USD/JPY, the yen side of the equation is also not looking any better. After the joint intervention move, traders are still not entirely convinced that it will do enough to change the structural view on the Japanese currency.
The US-Iran war continues to rage on with still no firm decision and certainty on when the Strait of Hormuz will “reopen”. And even on any Iran-Oman agreement, what exactly does it mean to “reopen” again? It certainly isn’t going to be a return to pre-war status. However, will it be any better than it was back at the end of June? Or maybe even worse?
That will keep broader markets on edge, with oil prices still having that potential to explode again. Meanwhile, bond yields are still continuing to settle at a higher region despite the US jobs data setback last week. 10-year yields in the US are still at 4.655% today, keeping close to the key region around 4.70% for now.
The non-farm payrolls data on Friday pretty much just reaffirms a return back to the softer trend in the labour market, which has been persistent for quite a while now. It’s not quite enough to suggest a material deterioration in labour market conditions, but it certainly isn’t running hot enough to warrant immediate rate hikes.
In that lieu, the Fed is allowed to keep their eye on the prize i.e. the battle against inflation. And that makes the upcoming inflation data a much more important focus point for markets.
For USD/JPY, I would argue that the balance of risks are still tilted to the upside. That so long as the US-Iran conflict continues as it is for longer.
However, joint intervention risks are likely to cap gains closer to 160 for now. As for downside risks, they can only materialise in stronger fashion if and only if US price pressures cool significantly this week and if accompanied by a more positive turn of events in the Middle East.
That might invite a push back towards the 155-156 region, where dip buying is once again well expected.
This article was written by Justin Low at investinglive.com.