Friday forex follies: Japan wage data tips the BoJ rate hike scales

The global stage seems tranquil, unfazed by recent political shake-ups in South Korea and France, which have quickly become mere ripples in the vast market ocean. Meanwhile, the U.S. dollar, easing by 0.5% on Thursday and clocking its third successive decline—a scene not witnessed since September—adds a touch of intrigue. This slight retreat may lead some to ponder whether the dollar's resilience is finally cracking.

However, such a view may be myopically overlooking the typical year-end behaviour of the dollar, which often faces selling pressure. This seasonal trend could be accentuated this year by a cocktail of monetary policy anticipations: a potential Fed rate cut, a probable Bank of Japan rate hike, and a European Central Bank that might lean less dovish if Isabelle Schnabel sways the board. This nuanced monetary landscape could redefine currency dynamics as the year draws close, hinting at a more complex interplay of global financial forces.

Nonetheless, Eurozone government bond spreads tightened significantly, fueled by a surge in risk sentiment after Marine Le Pen suggested that a new budget could be on the horizon within weeks. Attention now pivots to the US, where today's release of the critical payrolls report stands as the center of financial discourse. This report holds significant weight, but parsing today's data will be particularly complex due to distortions from returning strikers and recent hurricane impacts. Traders and investors should mainly watch the unemployment rate—it's expected to provide key insights into the broader economic backdrop.

FX markets are finding themselves on the weaker end of recent US dollar ranges ahead of NFP, yet all eyes are fixed on the ever-volatile USD/JPY.

The USD/JPY pair continues to be pegged under a 'fade the rally' strategy around the 150.50-60 level, especially after Bank of Japan's dovish board member Toyoaki Nakamura expressed openness to a rate hike. This pivot in stance fuels ongoing speculation regarding the BoJ's readiness to tighten monetary policy soon. My modelling now confidently tips the scales toward a December hike after recent revelations. October brought news that Japan’s base salary growth surged to a 32-year high, invigorating real wages following a duo of declines and bolstering the statistical backbone for potential central bank action. This combination of economic signals paints a more convincing picture of imminent policy adjustments.

Indeed, supported by the prospect of a rate hike by the Bank of Japan (BoJ), which significantly diverges from the monetary easing trends prevalent in other G10 economies, the Japanese yen is expected to demonstrate stronger performance against other currencies. This development may create an additional opportunity for the EURJPY pair as Euro positioning adjusts in response to alleviating political risks in France. Nevertheless, year-end trading frequently evolves into a complex puzzle characterized by unpredictable flows and strategic positioning that can obscure fundamental trends.

ASEAN currencies are on the front foot, riding high on a wave of broader dollar long unwinding. e USDCNY, which has notably retreated from the critical 7.3000 level. This move is bolstered by the strategic finesse of the People's Bank of China (PBOC), which has astutely kept its daily USDCNY fixing below the 7.2000 mark. This decisive action by the PBOC provides a stalwart foundation for the yuan, effectively steadying the ASEAN FX market against volatile market conditions.