JPY eases back as BoJ sources lower hike expectations

European markets are moving tentatively higher in early trade, as traders weigh up whether yesterday’s rebound for global equities was a dead cat bounce or indicative of a potential bottom. Dip buyers will undoubtedly search for clues over whether it is time to step in, with tomorrows CPI inflation report likely to represent the dominant event that will influence the FOMC ahead of next week’s meeting.

The pound has been on the rise in early trade today, following on from a jobs report that provided a welcome reversal of last months concerning spike in claimants. While the normalization of the UK claimant count and steady unemployment rate provide two clues as to the relative stability of the jobs market, the Bank of England will be particularly encouraged by the slump in average hourly earnings which fell from 4.6% to 4.0%. The easing wage pressures evident in this report highlight the growing perception that workers do not need to demand bumper salary increases to deal with the perceived upward trajectory in prices, with earnings growth now less than half the 8.6% peak seen a year ago.

The Japanese Yen has been easing back after BoJ comments highlighted a low likeliness that we will see the bank raise rates once again next Friday. With the US jobs report having eased recession fears for many, the negative reaction in equities had been attributed to the easing likeliness of a 50bp cut from the Fed. However, with markets remaining uncertain over whether the USDJPY carry trade has fully unwound, the risk of a sharp move from the Fed is the potential downside implications for USDJPY. As such, as cautious approach from the BoJ serves to ease concerns of rapid further unwinding in the Yen carry trade, allowing the Fed to cut by 50bp if they deem it necessary.