USD/JPY – Yen Approaches 104 Ahead of US Job Reports

USD/JPY has posted gains on Friday, continuing the upward movement which has characterized the pair this week. Currently, USD/JPY is trading at 103.60. On the release front, Japanese Consumer Confidence posted a reading of 42.0, above the estimate. In the US, the focus is on employment numbers, led by Nonfarm Employment Change, one of the most important economic indicators. The US will also release wage growth data and the unemployment rate.

Japanese indicators have not looked positive this week. Consumer Confidence rose to 42.0 points in August, its highest level since December 2015. Still, the Japanese consumer remains pessimistic about the economy, and pessimistic consumers are apt to hold tight to the purse strings and spend less, which has negative ramifications throughout the economy. On the business front, Japanese Capital Spending continues to soften, pointing to weaker spending in the business sector. The indicator came in at 3.1% in the second quarter, compared to 4.2% in Q1. This marked the weakest gain since Q4 of 2014. There was no relief from the manufacturing sector continues to struggle, as Final Manufacturing PMI came in at 49.5 points. The index has posted six straight readings below the 50-point level, pointing to ongoing contraction. These soft numbers have weighed on the yen, which has sagged 3.0 percent since August 22.

US employment numbers enjoyed a good week, but the economy will face a major test on Friday, with the release of Nonfarm Employment Change. Unemployment Claims came in at 263 thousand, better than the forecast of 265 thousand. It marked the third straight week that the indicator has beat estimates. Earlier in the week, the ADP Nonfarm Employment Change was little changed in August, posting a gain of 177 thousand. This beat the forecast of 174 thousand, the third straight month the indicator has exceeded the forecast. Will the NFP report follow suit? The July reading of 180 thousand was dismal, as the actual reading was just 180 thousand. The bar for August is considerably lower, with a forecast of 180 thousand. The markets will also be keeping a close eye on Average Hourly Earnings, which measures wage growth. The estimate for the August report stands at 0.2%.

With the markets again abuzz about a possible rate hike in late September, Friday’s US employment numbers will be even more critical. The catalyst for renewed optimism about a rate hike was Federal Reserve chair Janet Yellen’s upbeat speech about the US economy, and her broad hint that the case for a rate hike had strengthened. However, Yellen did not provide any specifics on a timeline for a move by the Fed. As for Friday’s employment releases, August job data is often unreliable and tends to miss market forecasts. If the August NFP follows this trend with a soft showing, the Fed may give the economy a “free pass” and overlook it. At the same time, a strong release will not mean that a September hike is a lock. Given the exceptional strength of the labor market, the Fed will find it hard to justify a rate increase strictly based on strong job numbers.  Stronger inflation numbers for August, for example, would make a rate hike an easier sell for Fed members who remain uneasy about raising rates. These indicators will be released in mid-September, just before the Fed policy meeting on September 21. For those traders tracking the odds of a rate hike in 2016, the CME Group FedWatch tool, the likelihood of a September hike has dropped to 24 percent, while a December increase is pegged at 56 percent.

USD/JPY Fundamentals

Friday (September 2)

• 1:00 Japanese Consumer Confidence. Estimate 41.6. Actual 42.0
• 8:30 US Average Hourly Earnings. Estimate 0.2%
• 8:30 US Nonfarm Employment Change. Estimate 180K
• 8:30 US Unemployment Rate. Estimate 4.8%
• 8:30 US Trade Balance. Estimate -43.0B
• 10:00 US Factory Orders. Actual 2.1%

*All release times are EDT

*Key events are in bold

USD/JPY for Friday, September 2, 2016

USD/JPY September 2 at 6:30 EDT

Open: 103.25 High: 103.71  Low: 103.12 Close: 103.56

USD/JPY Technical

• USD/JPY was flat in the Asian session and has posted slight gains in European trade
• 102.36 is providing strong support
• 103.73 is a weak resistance line and could break during the Friday session
• Current range: 102.36 to 103.73

Further levels in both directions:

• Below: 102.36, 101.20, 99.71 and 98.95
•  Above: 103.73, 104.99 and 106.38

OANDA’s Open Positions Ratio

USD/JPY ratio is showing slight gains in short positions on Friday, consistent with gains by USD/JPY. Long positions have a strong majority (63%), indicative of trader bias towards USD/JPY continuing to move to higher ground.

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