Japanese Yen pares gains amid risk-off trading ahead of NFP

• Having rebounded from lows of 157.26, USD/JPY climbs towards 158.30.
• Expectations of a robust US NFP release later in the day, alongside risk aversion, are underpinning the US Dollar.
• Further Yen gains remain possible against a backdrop of selling in AI stocks and Japanese portfolio rebalancing, according to OCBC experts.

Expectations of a strong US Nonfarm Payrolls (NFP) report later on Friday, coupled with increased safe-haven demand as risk appetite weakens, have lifted the US Dollar (USD) and erased the Japanese Yen’s (JPY) earlier gains. Following a rebound from lows of 157.26, USD/JPY is trading around 158.30. The pair is heading for a second successive weekly advance, although it remains confined to the trading range established over the past four weeks.

Concerns that the Democratic sweep in the US midterms will bring tighter regulation of the AI industry and the cancellation of plans for additional data centres have fuelled a technology-led equity sell-off on Friday. Against that backdrop, traders have sought safety in assets such as US government bonds and the US dollar.

Markets position for robust US Nonfarm Payrolls data

A strong US NFP release could also reinforce the argument for another Federal Reserve interest rate increase in December, and markets are positioning for such an outcome. Consensus forecasts point to net employment growth of 65K in October, compared with 29K in September. However, encouraging Jobless Claims and ADP Employment Change data earlier this week have raised hopes that the payrolls figure could exceed expectations. 

The broader backdrop nevertheless remains supportive of the Yen, as markets expect the Bank of Japan (BoJ) to continue tightening monetary policy, with a December rate increase firmly under consideration. Minutes from the BoJ’s September meeting lent weight to those expectations: policymakers highlighted the need for further interest rate increases, while some advocated a steeper tightening cycle. 

On the outlook for the Yen, OCBC strategists argue that “more frequent US-centric AI volatility in 2027 could strengthen its (JPY) hedge appeal.” According to OCBC, “the other potential JPY catalyst is Japanese portfolio rebalancing,” and markets will scrutinise “GPIF’s July-September results for signs of a shift towards domestic assets.” In a note, OCBC experts say that if “GPIF and other Japanese investors bring more money home or increase FX hedging on overseas assets, an important source of structural JPY selling could fade,”