USD/JPY holds positive ground above 161.00, all eyes on US NFP data

USD/JPY trades on a stronger note near 161.40 in Friday’s early Asian session.
The divergence of monetary policy between Japan and the US continues to undermine the JPY.
The rising expectation of Fed rate cuts this year and the fear of FX intervention might cap the pair’s upside.

The USD/JPY pair remains strong near 161.40 on Friday during the early Asian session. The US Dollar (USD) continues to strengthen to nearly fresh 38-year highs against the Japanese Yen (JPY) amid the wide rate differential between Japan and the US. Later on Friday, traders will closely watch the US June employment data, including Nonfarm Payrolls (NFP), Unemployment Rate, and Average Hourly Earnings.

The uptick in USD/JPY raises expectations of foreign exchange (FX) intervention from Japanese authorities. “In the interim, USD/JPY will look to UST yields, US Dollar (USD) for directional cues. For USD/JPY to turn lower, that would require the USD to turn/Fed to cut or for BoJ to signal an intent to normalize urgently (rate hike or increase pace of balance sheet reduction). None of the above appears to be taking place,” said OCBC strategists Frances Cheung and Christopher Wong.

According to the Federal Open Market Committee (FOMC) meeting on June 11–12, Federal Reserve (Fed) officials emphasized the data-dependent approach and refrained from committing to interest rate cuts until further observation. Some Fed officials lacked the confidence they needed to cut the interest rate, while several policymakers stated that it’s necessary to hike again if inflation were to rebound.

Nonetheless, the upside of the Greenback might be capped as the recent softer US PCE inflation data and weaker-than-expected Services PMI fuel expectations of Fed interest rate cuts this year. Traders will take more cues from the US employment data for June later in the day. The US NFP is estimated to show 190K job additions in June, while the Unemployment Rate is forecast to remain unchanged at 4%. Finally, the Average Hourly Earnings are forecast to drop to 3.9% YoY in June from 4.1% in May.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.

How do the decisions of the Bank of Japan impact the Japanese Yen?

One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation.

How does the differential between Japanese and US bond yields impact the Japanese Yen?

The BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against the Japanese Yen.

How does broader risk sentiment impact the Japanese Yen?

The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.

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