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- USD/JPY stalls ahead of US payrolls, gains on NFP strength.
- US Treasury interest rates rise on payroll report, 2-10 spread remains inverted.
- USD/JPY again fails to penetrate 137.00 leaving the pair technically vulnerable.
The USD/JPY stayed on the offensive this week without breaking any new ground or moving above its 24-year high of 137.00 from June 29. The Federal Reserve’s aggressive interest rate policies received a boost when strong US June payrolls alleviated recession fears and the USD/JPY jumped nearly a figure in response. American labor market stability has likely insured a 75 basis point hike at the June 27 meeting.
Bank of Japan (BoJ) policy inaction and the unfortunate assassination of former Prime Minister Shinzo Abe, have left the yen and the Japanese economy weaker. Fundamentally, the widening rate differential heavily favors the US dollar. Psychologically, Mr. Abe had been the strongest advocate for Japanese economic growth. Though Mr. Abe had resigned for health reasons in 2020, in his two terms as Japan’s longest serving prime minister, he had placed a strong emphasis on reviving the Japanese economy and remained one of its most effective public proponents.
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Japanese indicators lost ground in May with the Coincident and the Leading Economic Indexes missing forecasts at 95.5 and 101.4 respectively and falling below April’s levels. The Eco Watchers Survey, which tracks regional economic trends, was slightly better than forecast in its current view but much worse in outlook in June, an ominous development. Japanese household spending from May was also much weaker than expected at -0.5%, a gain of 2.1% had been forecast.
In the US, the Services Purchasing Managers Index from the Institute for Supply Management posted a good reading in the general measure at 55.3, but the crucial New Orders Index fell to 55.6 in June from 57.9, much lower than the 62.1 forecast. The Employment Index dropped into contraction at 47.4, from 50.2, also missing its 49.8 estimate. Jobless claims inched higher with the four-week moving average rising to 232,500 in the July 1 week from 231,75, to the highest ping in almost five months.
Nonfarm Payrolls added 372,000 workers in June much better than the 268,000 consensus forecast and nearly on par with May’s revised 384,000. The US unemployment rate was stable at 3.6%. Hourly earnings rose 5.1% annually, and May’s increase was adjusted 5.3% from 5.2%, evidence that pressure on wages is unabated. The Labor Force Participation Rate, a measure of worker involvement in the job market, fell to 62.2% from 62.3%. Though the drop was small it is a disconcerting sign that with more than 11 million unfilled positions in the economy, worker connection to the labor market remains well below pre-lockdown levels.
USD/JPY outlook
The USD/JPY was unable to move above its prior high but the pair remains bid. The combination of the US interest rate advantage and the waxing and waning fears of a global recession and the concomitant dollar safety trade have made the USD/JPY a nearly one way ticket since early March.
Treasury yields in the US advanced after the NFP report with the 10-year adding 6 basis points to 3.062% and the 2-year up 6.6 points to 3.086% in early New York trading.
Movement above the old high of 137.00 may require a new top in Treasury yields, which despite the gains on Friday remain below their mid-June highs.
The factors supporting the USD/JPY are unchanged from previous weeks but the repeated failure to penetrate 137.00 make the pair vulnerable to temporary retreats. That said the base at 134.50 to 135.00 is firm and should be expected to hold.
Japanese statistics July 4–July 8
US statistics July 4–July 8
Japan statistics July 11–July 15
FXStreet
US statistics July 11–July 15
FXStreet
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