NFPs Could Kill the Rally in USD/JPY

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Market Drivers April 5, 2013
Yen goes on a rollercoster taking out new highs before dropping
Rest of FX quiet ahead of NFP
Europe 0.14% Nikkei 1.58%
Oil $93.18/bbl
Gold $1551/oz.

Europe and Asia:
JPY Leading Index
JPY BOJ Monthly Economic Report for April
EUR German Factory Orders n/a
EUR Euro-Zone Retail Sales -0.3% vs. -0.2%

North America:
USD Unemployment Rate 8:30
USD Trade Balance 8:30
USD Change in Non-Farm Payrolls 8:30
USD Two-Month Payroll Net Revision 8:30
USD Average Hourly Earnings All Employees 8:30
USD Change in Household Employment 8:30
USD Consumer Credit 13:00
CAD Unemployment Rate 6:30
CAD Net Change in Employment 8:30
CAD Full Time Employment Change 8:30
CAD Ivey PMI 8:00

The yen went on a wild rollercoaster ride in Asian session trade while the rest of G-10 FX remained subdued ahead of the NFP report due later today. USD/JPY spiked to fresh year to date highs taking out the 97.00 figure in morning Tokyo dealing, but then fell sharply on profit taking dropping through the 96.00 handle before finally steading in early Europe.

The wild fluctuations were driven partly by the sharp moves in JGBs which saw yields drop to record low levels before rebounding. BOJ chief Kuroda reiterated his view that the central banks primary task was to defeat deflation which termed as being abnormally long but he also acknowledged that the new aggressive monetary policy could stoke an asset bubble and promised to be vigilant in suppressing any such developments,

The blow out moves in USD/JPY continue to be driven by the tectonic shifts in Japan’s monetary policy but the rally could be capped today if the US employment data disappoints the market. Ultimately USD/JPY trades on the spread between JGBs and USTs and with Japanese yields well below 1% there is little room left for the JGBs to appreciate further. That means that the only way the pair could sustain its rally is if US yields being to rise widening the spread. That in turn depends on continued US growth which may not be forthcoming.

There are a lot of reasons to believe that US labor data may miss bad this month, most notably the near 5 point decline in the employment component of the ISM services report which tends to be one of the better forecasters of the NFP number. The market is already primed for a lower reading so anything better than 160K will probably be seen as a relief. However, if the number prints at 125K or below the markets are sure to react negatively with US yields declining which in turn will put downward pressure on the USD/JPY.

A big miss in NFPs could send the pair through 95.50 and possibly even the 95.00 level as profit taking and stops kick in. A decent read however could calm the fears that the US economy is slowing markedly and buoy investor enthusiasm with the the pair possibly rising back to the yearly highs set in the overnight Asian session.

Boris Schlossberg
Managing Director

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