Japanese Yen surges as weak US jobs data questions Fed rate hike expectations

The US Dollar (USD) experienced a decline against the Japanese Yen (JPY) as the latter's strength and the Federal Reserve's (Fed) potential rate hike concerns took center stage following weak US employment data. Nonfarm Payrolls (NFP) data for July showed a decrease of 23,000 jobs, trailing market expectations of an increase of 80,000.

Revisions to prior months further deteriorated the employment picture, with June payrolls dropping from 57,000 to 20,000 and May from 129,000 to 63,000, resulting in a combined revision of 103,000 jobs.

The unemployment rate decreased slightly to 4.1% from 4.2%, while the Labor Force Participation Rate dropped to 61.4% from 61.5%. The annual Average Hourly Earnings growth slowed to 3.2% from a revised 3.4%, indicating a cooling US labor market. Consequently, the USD weakened significantly following the release of the data, with the FedWatch Tool indicating a reduced chance of a 25-basis-point rate hike at the September meeting.

In response to the excessive volatility in the Japanese currency, Japan's Ministry of Finance (MoF) and the United States (US) jointly intervened in the foreign exchange market. Finance Minister Satsuki Katayama stated that Japan would not hesitate to carry out further forex interventions if necessary. However, analysts at BBH argue that Japan's intervention record this year is "hardly convincing," as the interventions triggered short-term rallies but failed to sustain the upside momentum.

The size of Japan's most recent intervention on July 30 and July 31 is estimated to have been around ¥14 trillion, pushing USD/JPY from a high of 163.74 to a low of 155.23 within a short period.

Despite the market skepticism towards Japan's intervention effectiveness, BBH maintains that the coordinated US-Japan intervention significantly raises the cost of fighting a stronger yen, creating a firmer ceiling on USD/JPY. They also highlight the potential for further hawkish Bank of Japan (BoJ) rate hikes, given that the policy rate is near the lower end of the neutral range and the economy operates above potential.

TD Securities supports this view, stating that Governor Ueda's hawkish tone at the BoJ press conference leaves ample room for the central bank to accelerate the normalization process.

In the one-hour chart, USD/JPY is trading at 157.39, below the 100-period simple moving average (SMA) at 157.73 and the 200-period SMA at 159.60, indicating a bearish near-term tone. However, the Relative Strength Index (14) is in oversold territory near 24, suggesting that selling momentum may be stretched in the short term. On the upside, the next resistance levels are the 100-period SMA at 157.73 and the horizontal barrier at 158.57. On the downside, the primary support level is the previously plotted horizontal level near 155.23.