Will The NFP Beat Lead to a Rally in USDJPY?

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After hemorrhaging for two consecutive weeks, the dollar finally stabilized against the yen holding the key 78.00 level as a surprisingly robust US Non Farm payroll report shifted the markets perception of the US economy. After rallying through the 80.00 level several weeks ago the greenback has done nothing but give up its gains drifting towards the 77.00 barrier as currency traders view of the US economy turned decidedly dour. June’s anemic employment report served only to confirm the worst fears that US economic growth was stalling amidst investor uncertainty in Europe and the slowdown of business activity in Asia-Pacific.

However July’s report may have turned that gloomy assessment around as NFPs rose to a gain of 163K from 100K eyed. This was the first triple digit print in three months and the first upside surprise in more than five signalling that US growth may be regaining momentum. Although hardly blockbuster, the job report did show some positive trends with private payrolls gaining 172K as service gains soared to 148K from 60K the month prior. Average hourly earnings rose a modest 0.1% but rose nevertheless.

The better than expected labor news quelled some of the speculation that the Fed may initiate yet another round of QE by September. This was the critical factor behind the dollar’s rise against the yen on Friday, although some analysts and reporters continue to believe that despite better labor data results the Fed will move on QE as early as September. We strongly disagree. Not only is the Fed hampered by the improving fundamentals, it faces a massive risk of political backlash by acting on monetary policy just as the election season in US begins in earnest. The Fed assiduously attempts to remain politically neutral in order to preserve its power and stature and we seriously doubt that it would jeopardize its position by becoming an embroiling itself in the political drama unfolding in the US.

There is only one scenario under which the Fed may throw caution to the winds and aggressively move to ease monetary policy through non-conventional means. If the sovereign debt crisis in the EZ suddenly took a turn for the worse, with Spanish yields rising towards the 8% level and the region’s four largest economy on the brink of being shut out of the capital markets, then the Fed may move quickly on the monetary front, but only under the auspices of global liquidity crisis and very likely in coordination with other G10 central banks. Barring such a disaster turn of events, we do not believe that the Fed will act on QE anytime before the end of this year, a prospect that may encourage USD/JPY to rise from its base near the 78.00 level.

Boris Schlossberg
Managing Director

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