USD/JPY – Yen extends rally ahead of US jobs data

The Japanese yen has posted strong gains on Friday. In the European session, USD/JPY is trading at 142.76 at the time of writing, down 0.47% on the day. The yen is on a tear and is up 2.3% against the greenback this week.

Japan’s household spending misses expectations

Japan’s economy is showing signs of recovery but consumers are not convinced and continue to keep a tight grip on their purse strings. Household spending eked out a gain of 0.1% y/y in July, rebounding from a 1.4% decline in June but short of the market estimate of 1.2%. Monthly, household spending fell 1.7% in July, the steepest decline in six months. This followed a 0.1% gain in June and was much lower than the market estimate of -0.2%.

US Nonfarm Payrolls could shake up markets, determine size of Fed cut

Today’s nonfarm payroll report has been hotly anticipated. Will we see an improvement from the July debacle of 114 thousand new jobs, which routed the global financial markets? The markets have largely recovered from the melt down but investors remain nervous and another poor nonfarm payroll release could send the markets sharply lower. The market estimate for August stands at 160 thousand.

This week’s US job numbers were mixed and investors are hoping to get some clarity about the labor market from today’s employment report. Unemployment claims dropped but JOLT job openings declined and missed expectations. The August ADP employment report dropped to just 99 thousand, down from a revised 111 thousand in July and way off the market estimate of 145 thousand. The ADP report has generally not been a reliable indicator for nonfarm payrolls, although the correlation has been stronger this year.

If the nonfarm payrolls release comes in as expected or higher, it could cement a 25-basis point from the Federal Reserve at the Sept. 18 meeting. Conversely, a weaker-than-expected reading would raise expectations for an oversize cut of 50 bps. The markets have currently priced in a 50-bps reduction at 43% and a 25-bps cut at 67% according the CME’s FedWatch, but I expect those odds to change before the day is over.

USD/JPY technical

• USD/JPY is testing support at 142.79. Below, there is support at 142.13.

• There is resistance at 143.51 and 144.17.