Week in FX Asia – USD/JPY Caught between Oil and U.S. Jobs Data

• USD/JPY slipping from 120 price level
• Low Oil Price to Help Japanese Recovery
• Japanese Government preparing 3 Trillion Yen Boost

USD/JPY will end the week lower than ¥120 after the United States nonfarm payrolls (NFP) report failed to live up to expectations.

Rate divergence realities and expectations will continue to drive the FX market in 2015. The Bank of Japan (BoJ) has done its part to weaken the JPY, but it is dependent on the Fed following through with an interest rate hike or the currency is likely to appreciate.

Even after the headline number of U.S. jobs was higher-than-expected the market focus was driven to the hourly wages. Given the decentralized approach that the Federal Reserve has pushed regarding employment to avoid focusing just on number of jobs and the unemployment led to the lower wages that raised warning flags regarding the U.S. recovery. Those warning signs could mean a further delay in the eventual hike of U.S. benchmark interest rates.

Going by Fed Chair Janet Yellen, the timing was expected this spring, six months after the end of the Fed’s bond-buying exercise. Now futures markets and Fed members are pointing toward late summer or even the fall of 2015 for the first rate hike.

The weak yen and the low price of oil has already made some Japanese companies repatriate their manufacturing business. One of the reasons that Japan is missing out on a competitive edge with the weak JPY last year was because of the amount of manufacturing that was outsourced in the last decade. The return of home based manufacturing is good for the Japanese economy as it could result in a wage increase and job creation with are necessary for boosting consumption.

The Japanese government on Friday announced that it is preparing a ¥3.12 trillion supplementary budget to combat the economic malaise caused by the April sales tax hike. There will be no need to issue new debt as unspent funds from 2013 and tax revenue from the current fiscal year will be used.

The Bank of Japan with its Halloween expansion of stimulus and the Japanese budget will continue to keep local rates low while pushing for higher inflation. The combination could have the desired effect of enticing consumers to spend more triggering a virtuous cycle helped by higher wages from companies that are enjoying higher revenue.

Next Week For Asia:

Last week forex market agenda was full of big releases. Next week will not be as action packed. The European Court decision has the potential to move the market the most if there is an unexpected outcome to the ruling on the legality of European Stability Mechanism (ESM). In Asia the Chinese new loans will be reported. Analysts have begun to anticipate a Chinese credit crunch. Australia will report its employment statistics which after last month’s surprise to the upside in the number of jobs, but a warning in the low number of hours worked. Analyst will be waiting to dig into the official data for further proof of the Australian employment recovery.