The Dollar/Yen moved sharply higher on Friday with the Forex pair closing in a position to breakout to the upside of its nearly one-month range. The price action reflects a major adjustment by traders to renewed expectations of the U.S. Federal Reserve’s interest rate hiking campaign.
On Friday, the USD/JPY settled at 131.191, up 2.504 or +1.95%. The Invesco CurrencyShares Japanese Yen Trust ETF (FXY) closed at $71.07, down $1.31 or -1.81%.
US Dollar Driven Higher by Surge in Yields, Rising Fed Rate Hike Expectations
The spike in prices was fueled by soaring U.S. Treasury yields which spiked higher after data showed that U.S. Non-Farm Payrolls surged by 517,000 jobs last month, the most in six months. Economists in a Reuters poll had expected a gain of 185,000. Data for December was revised higher to show 260,000 jobs added instead of the previously reported 223,000.
Not only did the data point to a persistently tight labor market, but it also supported the argument that the Fed might have to remain a little bit more aggressive going forward.
At the close, financial market traders increased the odds for a 25-basis-point rate hike at the Fed’s March meeting. But they also changed their target of the U.S. central bank’s benchmark interest rate. They now see the Fed’s terminal rate peaking at 5.03% by June compared to 4.88% earlier.
Japanese Yen Longs Adjusting Positions amid Concerns of Higher US Rates
On Wednesday, the Japanese Yen rose even after the U.S. Federal Reserve increased its benchmark rate by a quarter-of-a-percentage-point to 4.5%-4.75%. Following the move, Fed Chair Jerome Powell said that with the labor market still tight he expects to need “ongoing” increases to get monetary policy “sufficiently restrictive” to engineer a more balance job market and bring down too-high inflation.
The Japanese currency rose because traders were skeptical of such a move after Powell repeated references to the start of a disinflationary trend as signaling that just one more rate hike, in March, could suffice.
Yen traders reversed these fresh long positions and then some on Friday, signaling that investors were making adjustments to the possibility the Fed will continue to drive rates into at least June and over the 5.0% threshold.
This Week’s Outlook
We’re looking for USD/JPY investors to continue to make adjustments to their previously bearish outlook. This means further upside action.
The first real test for investors this week will be Fed Chair Powell’s speech at 17:00 GMT on Tuesday. He’s not likely to deviate from his remarks last Wednesday, but this time traders may interpret them as hawkish rather than dovish.
Traders are likely to become more data dependent too. The next major U.S. economic release that may give further clues on Fed policy will be consumer price data for January due on Feb. 14.