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FX Update: USD grinds higher, but JPY strength trumps all
John J. Hardy
Chief Macro Strategist
Résumé: The US dollar firmed further after Friday’s US jobs report, but the JPY managed to rally across the board despite higher US treasury yields.
A new twist as strong US data pumps USD and yields, but JPY outperforms.
The US dollar has strengthened further since Friday’s strong jobs report showed far better payrolls growth than expected (+256k vs. +165k expected) and the unemployment rate ticking down 0.1% to 4.1% vs. expectations of an unchanged reading of 4.2%. The US dollar jumped, with the very notable exception of USDJPY by the end of the day. EURUSD ended the day lower and has even tested below 1.0200 in today’s trade with GBPUSD all the way to nearly 1.2100 today as sterling underperformed once again. More on sterling below.
US treasury yields jumped higher all along the curve on the US data, although worth noting that the short-end of the curve jumped more aggressively than the long end this time, which flattened the curve by several basis points (the 2-10 spread), the sharpest such move since last November. Treasuries came under renewed pressure 90 minutes after the jobs report on a preliminary University of Michigan survey showing a jump in both short-term and 5-10 year inflation expectations, both of which hit 3.3%. For the longer-term inflation expectations, that is just short of the 29-year highs of 3.4% posted in two months of 2008. Risk appetite took a beating Friday and ahead of the US open Monday, with US major stock indices tumbling through key supports.
Chart: USDJPY
The USDJPY move on Friday confounded the tendency for the pair to track US treasury yields, which jumped higher on the strong US jobs and inflation expectations data Friday – and yet USDJPY closed the day lower after testing new highs. This divergence from “normal” behavior demands our full attention. It appears that the USDJPY move correlated closely with the risk appetite swings on Friday, a development that has continued to start the week. It’s too early to tell whether USDJPY has jumped into a new behavior pattern or if this is more about the market hedging its bets ahead of Trump taking office again next week and/or the anticipation of the Bank of Japan meeting the week after next. The sell-off in JPY crosses was far greater than the USDJPY sell-off, which has proven quite shallow so far. The 156.00 level is the first minor downside trigger here for USDJPY and I still suspect that we would need to see both US treasury yields and general risk sentiment drop for USDJPY to threaten a major slide that threatens 150 and beyond to the downside. Both of the last sell-offs of size unfolded in the context of significant consolidations that saw lower US yields.
Elsewhere: GBP woes continue, China supports yuan
Sterling suffered fresh weakness as global yields jumped once again and risk sentiment faltered. As I outlined in my last update, sterling will likely remain vulnerable in any risk-off scenario and/or if bond yields globally continue higher, as the UK’s twin deficits weigh. The market is getting nervous as we recall the late 2022 Truss supplementary budget debacle, although the Labor government will be quick to respond if the situation worsens materially, but the sharpness of the move has us on the edge of our seats. Watching the critical 1.2000 area in GBPUSD and in EURGBP, the key 0.8450 area for whether this move is corralled or extends aggressively.
The Chinese yuan firmed slightly after China adopted fresh measures to signal it does not want its currency to weaken after USDCNH has risen to nearly tease the multi-year high of 7.375, a level that was touched in both 2022 and 2023. The PBOC and other regulators announced measures allowing firms to borrow more from overseas and tweaked its “macro-prudential parameter” for banks and firms for the first time since mid-2023. It also warned that it would deal with any behavior that may disrupt market order in the yuan exchange rate.
Major event risk highlights for the rest of the week:
Tuesday
- UK 20-year Gilt auction – status of demand for long term UK sovereign debt could well impact sterling in either direction
- US Dec. PPI. Normally merits a tiny fraction of interest relative to CPI tomorrow, but market is a bit touchy on all things inflation-related here.
Wednesday
- UK 10-year Gilt Auction - as per above, sterling sensitive to both global yields and supply/demand in Gilt market
- UK Dec. CPI – sterling could use some in-line to weaker inflation prints if it wants to find a floor sooner rather than later.
- US Dec. CPI. Market to remain touchy in either direction on inflation surprises hear. At least one major bank now saying no further Fed rate cuts will be on offer this year, with only 25 basis points of easing now priced into the forward curve for the 2025 calendar year.
- US financials kick off earnings season on Wednesday. Wednesday sees JPMorgan Chase, Wells Fargo, Goldman Sachs and Citigroup reporting earnings, among others, with the other major banks reporting the following day. This is an important test of sentiment as the earnings season gets under way. The US equity market is an important coincident indicator for risk sentiment as when volatility picks up there, correlations often tighten across assets. Key technical supports have fallen in the major US equity indices, so market energy/volatility potential in both directions has picked up and is doing so just ahead of earnings season kicking off in earnest and Trump taking office next Monday.
- US Fed Beige Book - interesting for anecdotal regional reporting on status of business for companies.
Thursday
- Australia Dec. Employment Data: AUD has been frozen in a range in the crosses even with a supportive development like the strong rally in copper – will remain most reactive to any shift in China stimulus policy.
- US Dec. Retail Sales The report for the key holiday shopping season.
Friday
- US Dec. Housing Starts and Building Permits – no surprise if these number disappoint on the big backup in long yields and thus, yields for mortgages.
Table: FX Board of G10 and CNH trend evolution and strength.
Note: the FX Board trend indicators are only on a relative scale and are volatility adjusted. Readings below an absolute value of 2 are fairly weak, while a reading above 3 is quite strong and above 6 very strong.
The dominant trends reading loud and clear here, as USD and gold sit atop the leaderboard (although gold having an ugly sell-off intraday today), while sterling is the . Note the big shift in JPY momentum over the last two days, however – the largest momentum shift of any currency on the board.
Table: FX Board Trend Scoreboard for individual pairs.
Multiple JPY crosses flipping to a positive trend for JPY (negative for cross/JPY) on the close on Friday, including EURJPY, AUDJPY, CHFJPY, NOKJPY, SEKJPY and NZDJPY. Silver trying to cross to positive, although today’s price action ugly and there is no impulsivity in the recent rally attempts – wait and see there.