Yen Soars as Dour NFP’s Sinks U.S. Yield Expectations, Will Firm Risk Appetite Reverse Gains?

USD/JPY

The USD/JPY spiked lower following the disappointing U.S. Non-farm payroll report as the weak labor market raised the outlook for additional QE efforts from the FOMC. The prospect of more asset purchases will push out the horizon for a rate hike which may become a weighing factor for the pair. Indeed, the pair was receiving support as the pump priming from the central bank had raised the outlook for inflation. Improving fundamentals created a possible scenario w here policy makers would need to tighten before liquidity providing efforts ended. We can see that interest rate expectations for the U.S. have become the main driver of price action for the pair holding a 51% correlation. A strong service sector report was more in line with previous releases increasing the odds that the November employment report was an outlier and current growth will be reflected in future hiring gauges. Therefore, we could see bullish momentum return if the world's largets economy continues to show improvement.

Driver of Price Action	Current Influence	Correlation	Week Ago	Month Ago
JPY Interest Rate Expectations	Low	-0.8	-0.3	0.15
USD Interest Rate Expectations	High	0.51	0.46	0.08
Risk (Dow)	Low	-0.09	-0.14	0.20

BoJ Interest Rate Expectations

Interest rate expectations for Japan are at the highest level in some time but ultimately will have little bearing on direction for the pair. OIS are still only pricing in 2bos in tightening over the next year which reflects the central banks inability to be able to begin tightening as they remain concerned over deflation risks. Discuss this and trading ideas join the USD/JPY forum.

Credit Suisse (OIS) BoJ

Source Bloomberg – Prepared by John Rivera

FOMC Interest Rate Expectations

U.S. interest rate expectations took a major blow following the dour non-farm payroll report with OIS now pricing in 11.5 bps of tightening over the next year. Yield expectations were starting to trend higher again after the crisis in Europe temporarily weighed on them. The upcoming fundamental calendar for the U.S. is pretty light so we may see the prevailing forecast remain unchanged until the FOMC rate decision on December 14th. Therefore, the USD/JPY could also remain in a holding pattern without a catalyst from the broader market.

Source Bloomberg – Prepared by John Rivera

Risk

A better than expected ISM non-manufacturing reading helped offset a dour employment report which showed the economy added 39,000 jobs versus forecasts for 150,000. The service sector accounts for 70% of GDP and has the greatest potential for adding new jobs, but has lagged the manufacturing sector in hiring. A strong start to the Holiday shopping season has raised the outlook for growth in the sector and its potential contribution to the labor market. The Dow is now on track to re-test the yearly high of 11.451 where we could see a potential double top, increasing downside risks. However, a break above could lead to a Santa Claus rally which could weigh on the Yen. Discuss this and other fundamental data in the Economics Forum.

Dow (Daily)

Source Bloomberg – Prepared by John Rivera

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