Upbeat US NFP bolsters hawkish Fed outlook as Japanese Yen weakens

Two days of USD/JPY losses end as robust US Nonfarm Payrolls support the Greenback.
Another December Fed rate hike remains in focus as firm US labour figures bolster expectations.
Safe-haven support for the Yen is offset by declining JGB yields.

158.30 is the level for USD/JPY at the time of writing. The pair has recovered from an intraday low of 157.26, ending two days of declines on Friday. Better-than-forecast US employment figures have strengthened the US Dollar (USD), renewing attention on its yield advantage over the Japanese Yen (JPY).

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Employers added 165K jobs in October, according to the US Nonfarm Payrolls report, comfortably exceeding the 65K forecast. Further evidence of labour market resilience comes from upward revisions to September’s hiring, unemployment falling to 4.1% and wage growth exceeding expectations.

With little pressure from the report to ease its focus on inflation, the Federal Reserve (Fed) still has a December rate hike firmly on the table. Speaking on Friday, St. Louis Fed President Alberto Musalem said inflation must return to 2% “on a timely basis,” and added that “excess inflation today is coming from energy shocks and the AI buildout.”

After touching a five-week low near 101.20 earlier this week, the US Dollar Index (DXY) has recovered to around 102.15. The index measures the Greenback against a basket of six major currencies. US Treasury yields are recovering too: the benchmark 10-year yield has gained 4 basis points (bps) to 4.88%.

Further Dollar strength is nevertheless being constrained by lower US consumer inflation expectations. In the preliminary University of Michigan survey, November’s one-year expectation declined from 4.7% to 4.3%. The five-year reading slipped from 3.5% to 3.4%.

An AI-led equity sell-off initially generated safe-haven demand for the Japanese Yen. Purchases of Japanese Government Bonds (JGBs), however, drove domestic yields down, partly countering the currency support from risk aversion.

At around 2.63%, Japan’s benchmark 10-year yield is close to a four-month low and more than 4% lower on the day. The yield differential against the equivalent US bond consequently stands at around 225 bps. In these conditions, the hawkish outlook from the Bank of Japan (BoJ) provides the Yen with limited support.

Traders remain wary of building aggressive bullish USD/JPY positions, however, given the risk of Japanese intervention. Since late September, the pair has traded within a range following a recovery from an earlier intervention-led decline that briefly took it below 154.00.

Fed: Key Questions

How does the Federal Reserve’s role affect the US Dollar?

The Federal Reserve (Fed) sets US monetary policy with two objectives: stable prices and full employment. Adjustments to interest rates are its main means of pursuing those objectives. If prices climb too rapidly and inflation exceeds the Fed’s 2% target, higher interest rates are used to raise borrowing costs across the economy. The US Dollar (USD) strengthens as a result, as international investors find the US a more attractive destination for their money. Conversely, inflation below 2% or an excessively high unemployment rate may prompt the Fed to cut interest rates. By encouraging borrowing, such cuts put pressure on the Greenback.

What is the Fed’s monetary policy meeting schedule?

At eight policy meetings each year, the Federal Reserve’s (Fed) Federal Open Market Committee (FOMC) reviews economic conditions and decides monetary policy. Twelve Fed officials participate in the FOMC: all seven members of the Board of Governors, the president of the Federal Reserve Bank of New York and four of the other eleven regional Reserve Bank presidents. Those four serve rotating one-year terms.

How does Quantitative Easing (QE) work and affect USD?

To substantially expand credit flows through a stalled financial system, the Federal Reserve may turn to Quantitative Easing (QE) in extreme circumstances. This unconventional policy is used in crises or periods of extremely low inflation. During the Great Financial Crisis in 2008, it was the Fed’s preferred tool. Under QE, the Fed prints additional Dollars to purchase high-grade bonds from financial institutions. The US Dollar typically weakens as a result.

How does Quantitative Tightening (QT) work and affect the US Dollar?

As the opposite of QE, quantitative tightening (QT) sees the Federal Reserve halt bond purchases from financial institutions. It also stops reinvesting the principal received when its bond holdings mature into new bonds. The effect on the US Dollar’s value is generally positive.