USD/JPY approaches 116.00 even as yields dwindle, Japan PM Kishida, US NFP eyed

USD/JPY picks up bids to refresh intraday high around 115.90 as Tokyo opens for Friday.

The risk-barometer pair dropped the most since mid-December the previous day as market fears of a faster rate hike by the US Federal Reserve (Fed) and coronavirus propelled the safe-haven demand for the Japanese currency. However, the cautious sentiment ahead of the key US jobs reports for December probes the pair sellers of late.

After witnessing a steady rise in the covid infections at home and abroad Japan PM Kishida signaled to reinstate a few virus-led restrictions during Friday’s “Two-Plus-Two Talks”. “Prime Minister Fumio Kishida is set to place three Japanese prefectures under a quasi-state of emergency on Friday after surges in COVID-19 cases that local governors say are attributable to the spread of the Omicron strain at U.S. military bases,” said Kyodo news.

On the other hand, a two-week low of US inflation expectations, as measured by the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data, joined hawkish Fedspeak and FOMC Minutes to also portray the risk-off mood. That said, St. Louis Fed President James Bullard pushed for a March rate hike whereas Federal Reserve Bank of San Francisco President and an FOMC member Mary C. Daly marked the need to raise interest rates to keep the economy in balance.

It’s worth noting that the recent geopolitical tussles between Japan and North Korea join a fall in Japan’s real wages to exert additional downside pressure on the USD/JPY. “Japan's real wages fell in November for a third month as inflation outstripped stagnant nominal wages, a government data showed,” said Reuters.

Even so, the recent data from Japan has been mixed as Tokyo Consumer Price Index (CPI) jumped in December but the Overall Household Spending eased in November. For the US, the Factory Orders, Weekly Jobless Claims, ISM Services PMI and Good Trade Balance all came in downbeat but couldn’t stop the US dollar bulls amid strong favor for the faster Fed rate hike, which in turn propelled the yields.

Amid these plays, the US 10-year Treasury yields refreshed a nine-month high to poke 1.75% before ending Thursday’s North American session with 2.5 basis points (bps) of a daily gain near 1.728%, easing to 1.725% at the latest. The same weighed on the Wall Street benchmarks even as downbeat data pushed bears to satisfy with smaller losses. That said, S&P 500 Futures print mild gains and so do Japan’s Nikkei 225.

Moving on, a covid update from Japan PM Kishida will offer immediate direction ahead of the US employment report. Forecasts suggest the headline Nonfarm Payroll (NFP) rise from 210K to 400K while the Unemployment Rate may have eased to 4.1% from 4.2% prior. The underemployment rate, however, is likely rising from 7.8% to 8%. Given the upbeat expectations from the US employment data, Fed’s hawkish rhetoric is likely to be justified, which in turn could propel yields and the USD/JPY.

Read: Nonfarm Payrolls Preview: A strengthening labor market backs a tighter monetary policy

Technical analysis

USD/JPY seesaws between the weekly resistance line and an ascending support line from December 17, respectively around 116.10 and 115.60. Given the bullish oscillators and sustained trading above November’s high surrounding 115.50, the yen pair is up for further gains.