Japanese Yen Gains as Markets Look Toward US Labor Numbers

Key Points in Japanese Yen:

• US dollar / Japanese yen Dip back in Europe, with Euro / Japanese Yen vulnerability leads
• Markets see more monetary tightening, not just in Japan
• Tokyo’s intervention occurred before it approached current levels

basic background

The Japanese yen rose sharply against the US dollar on Friday, albeit in a market that may have been thinner than usual, as traders await official news on the US labor market.

USD/JPY fell below 143 in the European morning, possibly weighed down by some weakness in EUR/JPY as it was revealed that German industrial production fell in May, dashing hopes that it could at least hold steady.

Perhaps the main economy’s most obvious recluse is still the Bank of Japan, refusing to tighten its ultra-loose monetary policy even as everyone races to raise interest rates. The Bank of Japan still sees inflation as largely a global phenomenon, and concerns that Japan’s domestic demand it has long sought to nurture remain absent.

Rising interest rates in developed markets have eroded the yen’s comparative yield magic even further. There is a lot of speculation in the market that the Bank of Japan might adjust its monetary policy, particularly its control of domestic bond yield curves, but it seems almost unlikely that it will tighten monetary settings significantly.

The new BoJ governor, Kazuo Ueda, took office in April and has so far shown little inclination to move too far in politics.

What may worry traders more is the possibility that Tokyo will intervene in the currency markets to stop the yen’s slide. In the past, Japanese authorities have been lax about a weak currency, as it suits their export-dependent economy. Now, with many Japanese operations being outsourced overseas, a weaker yen is an even bigger problem.

The central bank intervened in the market last year, when USD/JPY climbed to 145. This level is now one that the market is approaching with some concern.

On Friday, the market is very focused not on Japan but on the United States, the official monthly labor market report. Non-farm payrolls are expected to have increased by 225,000 in June, with the unemployment rate falling to 3.6%. Earnings are expected to rise by 4.2% over the year. As expected, the expected numbers will keep the idea that US interest rates will rise too much and may affect the Japanese yen.

Technical Analysis

USD/JPY daily chart

Chart compiled using TradingView

The USD/JPY rally appears to be fading before recovering from the steep declines seen between October 2022 and January this year. It may be too early to say that the attempt has failed, but the bears on the yen have work to do. This recovery is back on track.

They came tantalizingly close to regaining the steep lows seen on November 10, but have so far failed to bridge the gap between current market levels and the trading range seen near the end of last year.

For now, despite the recent weakness, USD/JPY looks well supported above the first Fibonacci retracement of its rally upward from January lows to recent highs. This does not happen until 140,752. Before that there is potential support at 140.301, June 20th high.

However, the pair looks more consolidated than at serious risk of reversing at this point, with the bullish uptrend continuing securely. It would take a sustained return to the May levels around the 136 handle, perhaps at least, to challenge that view.

– By David Cottle for DailyFX