Bears are in control of the USD/JPY pair on Monday morning, as they managed to grab a hold of the pair at the end of last week. It looks like the pair got sucked into a new whirlpool and is unlikely to escape in the near future.
The key trigger for the dollar was the US labor market data that was published on Friday. Despite the fact that the data turned out to be quite positive, the greenback still fell on many fronts.
The report from the U.S. Labor Department showed that nonfarm payrolls rose by 223,000 in December, exceeding projections of 200,000. Meanwhile, the unemployment rate declined to 3.5% y/y against estimates of 3.7%.
The statistics on average hourly earnings were negative for the greenback. The figure rose only 4.6% last month, below market expectations of 5.0%.
Weak wage growth has increased speculation about a further slowdown in US inflation and, consequently, less aggressive behavior by the Federal Reserve at its February meeting.
Weakening hawkish market expectations led to a sharp decline in US 10-year bond yields. During Friday's session, the indicator collapsed 9 bps to 3.625%.
Such a sharp drop in US bond yields was a headwind for the USD/JPY pair. At the end of the week, the major lost more than 200 pips, going from the daily high of 134.77 to 131.99.
The quote is still in the red zone at the start of the new working week. This morning, the dollar was under pressure after a less-hawkish commentary from Chicago Fed President Charles Evans.
In an interview with The Wall Street Journal, Evans said that US economic data is likely to contribute to a less hawkish Fed policy.
At the next FOMC meeting Evans expects a further slowdown in the pace of tightening. He believes that the central bank will raise the interest rate by only 25 bps, while the rate was raised by half a percentage point back in December.
News from Japan also aggravates the situation. On Sunday, Prime Minister Fumio Kishida said that his government and the Bank of Japan must discuss their relationship in guiding economic policy after a new BOJ governor is named in April.
The comment raises the possibility that Japanese authorities may reconsider their agreement with the central bank to fight deflation, adopted 10 years ago. This measure would be the first step for Japan towards normalizing its monetary policy.
Increased market expectations for a future pivot from the BOJ are contributing to the yen's strength, which has fallen by more than 13% against the dollar in the past year due to strong monetary divergence between the BOJ and the Fed.
Recall that last month the BOJ shocked markets with an unexpected widening of its target band for interest rates. Many investors took this measure as a prelude to a future BOJ rate hike, which caused the yen to rise sharply.
Most analysts believe the Japanese currency will show a few more notable jumps against the dollar this year. The JPY will rise every time there is more speculation about a possible rate hike in Japan and a slowdown in US tightening.
However, the dollar will not give up so easily and will fight with the yen throughout the year literally for every point, analysts predict Bloomberg. According to them, the dollar should be supported by inflation, which will be much steadier than forecasts.
"We expect concern over inflation will keep the Fed hiking rates until the upper bound reaches 5% by the end of the first quarter. With inflation expected to remain in the vicinity of a high at the 3% level in 2023, the Fed will likely hold rates at that peak level throughout the year in order to keep real rates above in restrictive territory, even as a mild recession is likely to develop in late-2023," says Bloomberg currency strategist Anne Wong.
According to the report, the Fed will cut rates to 4% only by the end of 2024. By that time, experts expect the first moves in BOJ policy.
"Even a hawkish successor likely wouldn't make any policy changes in 2023 more dramatic than removing a bias toward deeper easing from the BOJ's forward guidance. The real liftoff will probably be in 2024 – we see the BOJ raising the mid-point target for the 10-year JGB yield from 0% to 0.25% in 1Q24 and exiting its negative short-term rate in 2Q24," notes Bloomberg analyst Yuki Masujima.
As we see, despite all speculations the fundamental picture this year will remain more favorable for the dollar than for the yen.
However, the Japanese currency will have some convenient moments, when it can make a good recovery against the USD, like it is doing now.
Most analysts expect the USD/JPY pair to decline further this week. The main trigger for the asset should be the US inflation data for December, which will be published on Thursday, January 12.
According to preliminary estimates, the US consumer price index will fall to 6.5% y/y in December against the previous value of 7.1%.
If the forecast comes true, it would further reinforce the market's view that the Fed will slow the pace of rate hikes next month. Such a scenario is unfavorable for the USD.
From a technical point of view, the outlook for the USD/JPY pair also looks pretty bleak right now. Bearish signals of the MACD and a steady trading below important moving averages signal a further decline.
In case the bears manage to consolidate below 131.00, the recent multi-month low around 129.50 may be the last defense for the bulls, before the pair heads to the May 2022 low at around 126.35.
