Head of FX Strategy
Summary: Dramatic moves in the yen were underpinned by hawkish bets on Bank of Japan, with the closing window of opportunity creating urgency. As Fed cycle turns and BOJ speculation continues, there is room for yen to continue to rally, but focus is shifting to NFP today ahead of US CPI and Fed meeting next week. A beat on US jobs data could pushback on rate cut expectations for 2024, while a miss will see either goldilocks continue unless unemployment rate also rises.
Yen rallied sharply yesterday on traders increasing their bets of a BOJ exit. Bank of Japan governor Ueda’s comments yesterday still emphasized that BOJ will continue patient monetary easing, but there were elements of hawkishness such as a comment that it will become even more challenging to maintain easy policy towards the end of this year and into early 2024. He also said that BOJ has not decided whether to keep interest rate at zero or move it up to 0.1%, and at what pace short-term rates will be hiked after ending negative rate policy. This pushed the markets to price in odds of a tweak at the BOJ’s December 19 meeting.
The November global bond rally also suggests that the situation could be favorable for BOJ to tweak earlier than previously expected. Lastly, BOJ's timeframe to exit negative rates is tight now, they need to get there before other central banks start cutting rates. From a macro lens as well, inflation could ease significantly as supply chains normalize and energy prices cool, closing the potential window to tighten policy. This could mean a tweak in January or even December, but we continue to think that the BOJ tweak will be moderate.
There is significant room for yen to rally both on a positioning and valuation basis. However, there is still scope for the ride to be bumpy as dollar finds support if US data stays resilient and Fed pushes back on rate cut expectations. But a top for USDJPY in this cycle is likely behind us, and as the yen appreciates, investors need to watch for any short yen squeeze or forced unwinding of carry trades. Volatility in yen is likely to pick up as traders assess the path of Fed rate cuts while speculations of a BOJ exit continue to build. Today’s NFP could be key, followed by CPI and the Fed’s dot plot next week.
Big focus today is the US jobs data which could be a test of whether the pace of Fed easing priced in by the markets is justified or not. Market is expecting a strong headline jobs number as the resolution of the UAW strikes could mean that a lot of workers came back to the labor market. Unemployment rate may therefore be a bigger focus today, and any rise towards the 4% mark can spook concerns that the labor market is cooling. Labor data so far this week has been mixed, with JOLTS and ADP conveying a weakening labor market, but jobless claims last night still holding up possibly due to Thanksgiving and holiday-related hiring.
Consensus expects headline jobs to be up 183k in November from 150k previously. Unemployment rate is seen to remain unchanged at 3.9% and wage growth is likely to soften to 4.0% YoY from 4.1% previously.
If we get a beat on the headline expectations, that could push back on the rate cuts priced in for next year. This could see yields rising and pressure on equities, particularly the tech sector. USD could reverse higher, with the DXY index likely to be back above 104. The currencies that stand to lose the most on dollar strength include EUR (with EZ inflation easing suggesting more room for ECB dovish repricing) and AUD (after a dovish hold last week). Gold could also test the $2,009 support again.
If the headline is weaker than expected, but unemployment rate is steady, that could potentially fuel a continuation of the current goldilocks that market is pricing in. This means that equities can continue to run higher as yields plunge again, but FX may be a better play here. USD could extend its bearish momentum, with Gold and yen standing the most chances to gain. NZD and GBP could also hold up as further Fed dovish re-pricing takes place.
Biggest risk comes from a scenario where we get a headline miss, along with higher unemployment number. This could shift the market sentiment away from goldilocks to start to price in a recession, and equities stand to lose the most in that case despite the lower yields. USD could be sideways as a safety bid comes through, but Gold and yen still stand to gain.
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