The USD/JPY currency pair experienced significant bearish pressure during the American trading session on Friday. It gave up its prior advances and fell back near the 147.00 figure. As of writing, USD/JPY had fallen 0.75% on the day, trading at 147.30. The drop in valuation is a symptom of a larger issue. It’s mostly propelled by a massive decrease in US Treasury bond yields and intense USD heavy liquidation.
In the day, USD/JPY had been very much bouncing above that key 148.00 figure comfortably. Disappointing economic data out of the United States was the catalyst for the flip in investor sentiment. Consequently, the dollar fell sharply against other currencies, including the Japanese Yen (JPY).
Economic Data Influences Market Sentiment
The beginning of this beautiful change in market dynamics came when the Nonfarm Payrolls (NFP) report for August was released. This meant that new data showed an increase of just 22,000 jobs — well below expectations from analysts that pegged the number at 75,000 at least. This mismatch led some to question the health of the U.S. labor market. Perhaps most importantly, many fear it too might spell disaster for sustained long-term economic growth.
Furthermore, the unemployment rate increased by a tenth of a percent between July and August, from 4.2% to 4.3%—adding to the gloomy picture. The Labor Force Participation Rate ticked up from 62.2% to 62.3%. This change is a positive sign that more unemployed Americans are finding their way back into the labor force, but job growth remains weak.
“the change in total Nonfarm Payroll employment for June was revised down by 27,000, from +14,000 to -13,000” – US Bureau of Labor Statistics.
Taken together, these impressive figures have triggered widespread speculation over what the Federal Reserve will do with interest rates and the future of U.S. monetary policy more broadly. Stable or declining interest rates predicted as economic indicators, particularly consumer spending, continue to weaken. In response, traders sold the dollar aggressively, which USD/JPY felt the sharpest effect — collapsing in the immediate aftermath.
The Role of the Japanese Yen in Global Markets
Besides the US Dollar, Euro, and British Pound, the Japanese Yen is the most traded world currency. During times of economic uncertainty, investors quickly rush to gold, making it a safe-haven asset. Five key aspects determine how valuable it is. These are the underlying strength of the Japanese economy, the policy path defined by the Bank of Japan, and volatility in bond yield differentials between Japan and the US.
The Japanese Yen is a longstanding favorite among traders when global market volatility spikes. Fears over the health of the U.S. economy are spreading in the wake of Friday’s sobering jobs report. In reaction, market players moved to the JPY for more stability, increasing its value relative to the dollar.
Aside from changes to overall market sentiment, the value of JPY is closely connected to risk sentiment among traders. When markets become skeptical about future economic growth, demand for safer currencies such as JPY increases.
Treasury Yields and Currency Movements
With the week winding down, the recent sharp drop in U.S. Treasury bond yields has weighed heavily on the USD/JPY. This plunge in yields is pushing the currency pair lower. As bond yields go down, so do returns on investments in U.S. assets, making the dollar less attractive and decreasing demand for the dollar. This has in turn produced a wave of selling pressure on USD/JPY as traders reposition themselves ahead of the weekend.
As one of the major currencies, the differential between Japanese and U.S. bond yields is a key driver of JPY’s value against USD. With U.S. yields falling off a cliff, traders will likely expect more dollar weakness to come and position themselves for it.
USD/JPY fell below the key level of 148.00 towards 147.30. This move is indicative of a much larger shift in market forces, driven by economic data and a changing yield picture.