Harvest Global Markets :

On Thursday, the value of the US Dollar against the Japanese Yen (USD/JPY) dropped significantly by more than 4%, briefly falling below 142.00. Later, the broader financial markets saw a moderate recovery, causing the Japanese Yen to gain strength. By the end of Thursday, the USD/JPY was down by approximately 2%, and the Japanese Yen performed well for the week.

The decline in the USD/JPY was triggered by unusual comments from Bank of Japan (BoJ) Governor Kazuo Ueda, who unexpectedly hinted at a potential end to the BoJ’s negative interest rate policy, possibly in the early part of next year. This led to a rally in the Japanese Yen across the market. In October, Japan’s Core Consumer Price Index (CPI) inflation reached 2.9%, surpassing the BoJ’s 2% inflation target for the 19th consecutive month.

The BoJ has refrained from tightening its policy because it currently anticipates inflation dropping below 2% sometime in 2025. With expectations of significant wage increases in Japan next year as employers raise pay to counter rising prices, the BoJ seems ready to start discussing a reversal of its long-standing negative rate policy mechanism. This policy has imposed a slight cost on holding Japanese debt for the past seven years.

Currently, overly optimistic money markets are indicating a 20% chance of a BoJ rate increase at the Japanese central bank’s upcoming policy meeting on December 18 and 19. The BoJ’s next quarterly growth and interest rate review is scheduled for the end of January.

The USD/JPY reached four-month lows on Thursday, dropping by more than 4% from its highest to lowest point before ending the day with a comparatively moderate decrease of -2%. It hit four-month lows below 142.00 before recovering to close the day just above 144.00.

Despite a partial recovery during the trading day, the USD/JPY experienced one of its worst-performing days in over a year, similar to when the pair dropped below the 140.00 mark last November. Throughout Thursday’s trading, the USD/JPY shifted from a slightly bearish position to a significant decline below the 200-day Simple Moving Average. A substantial positive rebound will be necessary for the currency pair to recover to the 147.00 mark. The 50-day Simple Moving Average is currently showing a bearish trend well above Thursday’s price levels, declining towards the 1149.00 region.

High-impact employment data, known as Nonfarm Payrolls (NFP), from the United States (US) is scheduled for release by the Bureau of Labor Statistics (BLS) on Friday at 13:30 GMT. The upcoming US labor market report is anticipated to reveal the creation of 180K jobs in the previous month, compared to the addition of 150K jobs reported in October. The Unemployment Rate is expected to remain steady at 3.9%. Another closely-monitored metric, Average Hourly Earnings, is predicted to show a slight increase of 4.0% in the year through November, a small decrease from the 4.1% rise recorded in October. On a monthly basis, Average Hourly Earnings are forecasted to grow by 0.3% in the reported month, compared to a 0.2% increase in October.

The data on the US labor market is critical for shaping the US Federal Reserve’s (Fed) interest rate outlook for 2024, significantly influencing the valuation of the US Dollar (USD). With decreasing inflation in the US, there is a prevailing market expectation that the Fed has concluded its tightening cycle, with potential interest rate cuts anticipated as early as March.

The likelihood of a rate cut by the Federal Reserve in March is currently at 60%, as indicated by the Fed Watch Tool from CME Group. The chances of a Fed rate cut increased significantly after Federal Reserve Governor Christopher Waller, who is known for his hawkish stance, hinted at a change in policy. This shift is concerning for the US Dollar and US Treasury bond yields.

Governor Waller expressed this potential policy shift on November 28, stating, “If the decline in inflation continues for several more months – three months, four months, and five months – we could start lowering the policy rate just because inflation is lower.” Additionally, the October Core PCE Price Index data reinforced expectations of a more accommodative stance by the Federal Reserve. The Fed’s preferred inflation measure increased by 3.5% year-on-year, showing a slight moderation from the 3.7% reading while remaining significantly above the Fed’s target of 2.0%.