USD/JPY reverses at 50DMA, falls back under 113.00 despite more strong US macro data

• USD/JPY found resistance at its 50DMA and has slipped back under 113.00.
• Further strong US data has failed to support the pair.
• FX markets are in wait-and-see mode ahead of Friday’s NFP.

USD/JPY found resistance at its 50-day moving average in earlier trade in a telling sign that, despite surging short-end and real US yields on strong US macro data and a more hawkish Fed, the safe-haven favouring the yen remains strong. USD/JPY has been fairly subdued on Thursday and trades within recent intra-day ranges. The pair hit highs earlier in the session in the 113.30s, but has since reversed back to the south of the 113.00 level.

Strong US data

Better than expected initial jobless claims numbers for the week ending on 27 November failed to give USD/JPY any notable lift, as did the strongest monthly Challenger job layoff reading since 1993. The strong US data comes on the heels of a better-than-expected November US ISM manufacturing PMI survey and a slightly above expected ADP national employment number, both released on Wednesday. The string of strong US macro data reports ought to boost expectations for Friday’s official jobless claims report. Markets currently expect the report to show that 550K jobs were added to the economy last month and that the unemployment rate continued to decline to 4.5%.

In fairness, ahead of the key official US jobs report, it does make sense that the FX markets would enter wait-and-see mode to a degree. But the US dollar’s inability to recover its post-Omicron variant emergence losses versus the likes of the yen and euro this week despite Fed Chair Jerome Powell’s hawkishness earlier in the week triggering a recovery in Fed tightening expectations is perplexing. Recall that much of the USD depreciation versus the yen and euro seen last Friday was attributed to a pullback in Fed tightening expectations, so the question is, as these have recovered why has the dollar not kept pace?

Why USD/JPY remains subdued

Some have suggested that it is because the dollar was overbought this time last week and thus was due a technical correction anyway. Others point at long-end US yields. Unlike short-end and real yields, long-term nominal yields have not recovered after Powell’s hawkishness. The 10-year continues to trade in the low 1.40s%, barely above multi-month lows and more than 20bps down from pre-Omicron levels. USD/JPY tends to be most sensitive to US/Japan 10-year rate differentials. The bid in long-term bonds that has pushed yields down liekly reflects worries that the long-term outlook for US growth and inflation has become more muted with the Fed set to start tightening despite the threat of Omicron.