Upbeat US NFP strengthens hawkish Fed expectations and pushes Japanese Yen lower

• Strong US Nonfarm Payrolls support the Dollar, helping USD/JPY end a two-day run of losses.
• Robust US employment figures bolster expectations that the Fed will raise rates again in December.
• Lower JGB yields put pressure on the Yen, counteracting support from safe-haven flows.

Stronger-than-forecast US employment figures support the US Dollar (USD) on Friday, renewing attention on its yield advantage over the Japanese Yen (JPY). USD/JPY has consequently recovered after two consecutive days of losses. Having touched an intraday low of 157.26, the pair is trading at around 158.30 at the time of writing.

US employers created 165K jobs in October, according to the Nonfarm Payrolls report, comfortably exceeding the 65K forecast. The labour market’s resilience is also evident in upward revisions to September’s job gains, unemployment falling to 4.1% and wage growth exceeding expectations.

With the figures giving the Federal Reserve (Fed) little reason to retreat from its efforts to curb inflation, a December rate increase remains 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.”

Having touched a five-week low near 101.20 earlier this week, the US Dollar Index (DXY) has recovered to trade at around 102.15. The index measures the Dollar against a basket of six major currencies. US Treasury yields have also risen, with the benchmark 10-year yield up 4 basis points (bps) at 4.88%.

Further Dollar gains are, however, being restrained by a decline in US consumers’ inflation expectations. The preliminary University of Michigan survey puts one-year expectations at 4.3% in November, down from 4.7%, while expectations over five years have edged down to 3.4% from 3.5%.

An AI-led sell-off in equities initially drew safe-haven flows into the Japanese Yen. Purchases of Japanese Government Bonds (JGBs), however, also drove domestic yields down, eroding part of the currency’s support from risk aversion.

At around 2.63%, Japan’s benchmark 10-year yield is close to a four-month low, having fallen more than 4% on the day. The corresponding US yield is therefore around 225 bps higher. In these circumstances, the hawkish outlook from the Bank of Japan (BoJ) provides the Yen with only modest support.

The possibility of Japanese intervention nonetheless discourages traders from building aggressive bullish USD/JPY positions. Following a recovery from an earlier intervention-led decline that briefly took it below 154.00, the pair has traded within a range since late September.