USDJPY week 36

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Jump after the NFP

US Payrolls Increase by 1.37M and Jobless Rate Beats Forecasts

The US economy added 1.371 million jobs in August, easing from a downwardly revised 1.734 million in the previous month, and only slightly below forecasts of 1.4 million. That leaves payrolls near 11 million below its pre-pandemic level as more than 22 million jobs were lost in March and April. The unemployment rate tumbled to 8.4% from 10.2% in July and came well below market expectations of 9.8%.

Late Thursday, after the US data

USD/JPY did not manage to gain sufficient upside momentum and failed to settle above the 50 EMA

The initial market reaction to the macroeconomic data releases from the US caused the US Dollar Index (DXY) to retreat below 93.00.

The weekly report published by the US Department of Labor showed that Initial Jobless Claims declined by 130,000 to 881,000. This reading came in slightly better than the market expectation of 950,000. Other data from the US revealed that Unit Labor Costs in the second quarter rose by 9%, compared to analysts’ estimate of 12.1%, and the trade deficit widened to $63.6 billion in July from $53.5 billion in June. 

At the moment, the DXY is up 0.2% on the day at 92.85. Later in the session, the IHS Markit and the ISM will release the Services PMI reports. 

Meanwhile, the S&P 500 futures are down 0.6% on the day and a selloff in major US equity indexes could help the JPY find demand as a safe-haven and continue to cap USD/JPY’s upside.

Thursday, morning

The Japanese Yen lost 0.83 points or 0.08% to 106.255 against the US Dollar on Thursday. Investors moved into the US Dollar as the US Federal Reserve’s Beige Book noted that economic activity increased among most Districts, but gains were generally modest and activity remained well below its pre-pandemic level of activity. Meantime, Bank of Japan’s board member, Goushi Kataoka, noted that the central bank must take bolder monetary easing steps in the face of heightening the risk of deflation as the outlook for consumption and business spending weakened due to the COVID-19 pandemic. On the local data front, the au Jibun Bank Japan Services PMI was at 45.0 in August 2020, posting the seventh straight month of contraction in the sector as new orders fell at a steeper rate while new export orders declined rapidly.

The Nikkei 225 added 218.38 points or 0.94% to 23465.53 on Thursday, touching 7-month highs throughout trade after a gain of 0.47% in the previous session. Investors cheered as Bank of Japan’s board member, Goushi Kataoka, noted that the central bank must take bolder monetary easing steps in the face of heightening the risk of deflation as the outlook for consumption and business spending weakened due to the COVID-19 pandemic. Further boosting sentiment, Chinese Services PMI data expanded for the fourth consecutive month. Meanwhile, Yoshihide Suga, Japan’s chief cabinet secretary has announced he will join the race to succeed Prime Minister Shinzo Abe. On the local data front, the au Jibun Bank Japan Services PMI was at 45.0 in August 2020, posting the seventh straight month of contraction in the sector as new orders fell at a steeper rate while new export orders declined rapidly.

Japanese Yen Weakens
The Japanese Yen fell 0.137 points or 0.13% to 106.079 against the US Dollar on Wednesday as Deputy Governor of the Bank of Japan Masazumi Wakatabe said the central bank must continue to strongly commit to its 2% inflation target to respond to any overshooting or undershooting of prices. Meantime, Chief Cabinet Secretary Yoshihide Suga emerged as the leading candidate to replace outgoing Prime Minister Shinzo Abe at a leadership election expected this month, suggesting few major changes to economic policy.

Wednesday, morning

The three-day rally in the Dollar/Yen is beginning to pick up some momentum early Wednesday after the dollar bounced off two-year lows on Tuesday in response to stronger than expected U.S. manufacturing data.

The price action also suggests that worries about the country that led to a steep sell-off on Friday after Prime Minister Shinzo Abe’s surprise resignation announcement are over, with investors already beginning to price in a victory for Chief Cabinet Secretary Yoshihide Suga.

Tuesday, late afternoon

The Greenback is perking up as the US trading session comes online and market participants digest August 2020 manufacturing PMI data just released by the Institute of Supply Management. Prior to the opening bell on Wall Street, the broad-based US Dollar Index was deep in the red, down nearly 0.4% intraday. In large thanks to the overall solid PMI report that topped market expectations, however, the US Dollar has since caught a bid and erased earlier losses.

Tuesday, early morning

The dollar hit a more than two-year low and a fourth straight month of losses on Monday in the wake of the U.S. Federal Reserve’s policy shift on inflation.
Against a basket of currencies =USD the dollar was down 0.15% at 92.097 in midday trading, having earlier hit its lowest since April 2018. It is down 1.24% for the month, marking its worst August in five years and the longest run of monthly losses since the summer of 2017. 

The EUR, which makes up the majority of the basket against which the dollar index is weighted, was up 0.35% at $1.195, having gained 1.45% in August, also its fourth straight month of increases.

Investors are adjusting to a speech last Thursday in which Federal Reserve Chair Jerome Powell outlined an accommodative policy change that is believed could result in inflation moving slightly higher and interest rates staying lower for longer. 

“Even if U.S. central bankers are likely to be pleased about the interpretation of their measures, it is not good news for the dollar,” Commerzbank analysts commented. 

“If one expects the domestic purchasing power of the dollar to be eroded more quickly (as that is what inflation is) it is difficult to assume that it will maintain its purchasing power on the FX market in the long run,” they argued. 

Powell’s remarks last week continued a trend lower in the dollar. The Fed’s stimulus to offset the economic effects of the coronavirus pandemic has driven risk assets higher and hurt the safe-haven dollar.

USD/JPY failed to settle above the 20 EMA at 106.00 as the U.S. dollar found itself under significant pressure against a broad basket of currencies.

The U.S. Dollar Index gained material downside momentum and declined below the 92 level. It has recently tested lows at 91.78 and maintains solid chances to continue its downside move which would be bearish for USD/JPY.

Today, Japan’s economic reports surprised to the upside. In July, the Unemployment Rate increased from 2.8% to 2.9% but remained below the analyst consensus of 3%.

Manufacturing PMI increased from 45.2 in July to 47.2 in August compared to analyst consensus of 46.6.

The U.S. will also provide its Manufacturing PMI report today. Manufacturing PMI is projected to grow from 50.9 in July to 53.6 in August.

The general negative sentiment towards the U.S. dollar will continue to impact USD/JPY trading dynamics. While Japan has entered a period of uncertainty due to the health-related departure of Prime Minister Shinzo Abe, the market will likely focus on long-term prospects for U.S. interest rates.

In this light, it is especially interesting to see whether the yield of the U.S. 30-year government bonds will continue to increase, prompting speculation of the Fed’s stimulus intervention. At this point, the 30-year yields have stabilized just below 1.50%.

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