Renewed downward momentum for USD/JPY ahead of NFP report

USD/JPY: Softer US labour demand & stronger wage growth in Japan in focus

The yen has continued to strengthen during the Asian trading session resulting in USD/JPY falling to an intra-day low of 143.05 as the pair moved back closer to the lows recorded on 5^th August. Renewed downward momentum for USD/JPY was reinforced yesterday by the release of the weaker than expected US JOLTS report that has heightened concerns that Friday’s nonfarm payrolls report could surprise to the downside as well. The JOLTS report revealed further evidence that US labour demand is softening and wage growth is likely to continue to ease. After picking up in the previous two months, the number of job opening dropped sharply to a fresh low of 7.673 million in July which was the lowest level since January 2021. At the same time, the hiring and quits rates remained close to recent lows. The slowdown in the pace of hiring by firms makes it more likely that labour market conditions will continue to loosen if hiring is not sufficient to absorb new entrants into the labour supply. A disinflationary development for the US economy. On the other hand it remains reassuring that layoff off rate remains low and stable helping to ease some fears over a sharper slowdown.

In response to the weaker JOLTs report, the US rate market has moved to price in a higher probability of the Fed delivering a larger 50bps rate cut this month. There are currently around 36bps of cuts priced in ahead of the release of the nonfarm payrolls report on Friday. The nonfarm payrolls report would have to provide further evidence of a marked softening of labour market demand and loosening labour market conditions to encourage the US rate market to move to price in larger 50bps cut as the most likely outcome.

The case for a stronger yen was boosted as well overnight by the release of the latest labour cash earnings report from Japan. The report revealed further evidence of stronger wage growth in Japan which should give the BoJ more confidence to continue raising interest rates. Labour cash earnings increased by an annual rate of 3.6%Y/Y in July coming well above the consensus forecast for an increase of 2.9%. After stripping out distortions from survey sample changes, the BoJ’s preferred measure of wage growth was even stronger increasing by 4.8%Y/Y in July. The BoJ will also take note that base pay growth after adjusting from survey sample changes continued to pick-up to 3.0%Y/Y in July which was a new cyclical high. The data supports our outlook for the BoJ to hike rate again this year if financial markets conditions stabilize. BoJ board member Hajime Takata reiterated overnight that “it will be necessary to adjust the degree of monetary easing by shifting up another” if the inflationary trends align with projections”. He noted that “we need to proceed with making a world with positive interest rates”. Overall, the developments support our outlook for further yen strength (click here).            

USD/CAD VS. SHORT-TERM YIELD SPREAD

Source: Bloomberg, Macrobond & MUFG GMR

CAD: BoC leaves door wide open for further easing   

The broad-based US dollar sell-off yesterday triggered by the weaker US JOLTs report helped to lower USD/CAD back towards the 1.3500-level even after the BoC lowered their policy rate for the third consecutive meeting by 25bps to 4.25%. USD/CAD has corrected lower over the past month after hitting a high of 1.3946 on 5^th August. The recent correction lower for USD/CAD has been encouraged by a narrowing of expectations for policy divergence between the BoC and the Fed. While the BoC has led the way in the current easing cycle, the Fed is now expected to follow their lead by beginning to cut rates this month. Based on recent moves in short-term yield spreads alone, it appears that USD/CAD recently overshot to the downside when it fell to a low of 1.3441 at the end of August.    

The Canadian rate market has already moved to price in a lot of BoC rate cuts in the year ahead which provided a higher hurdle for a dovish surprise yesterday to weaken the Canadian dollar. The Canadian rate market is almost fully pricing in five more 25bps cuts from the BoC by the middle of next year. It would take the policy rate back closer to the BoC’s estimate of the neutral policy rate at between 2.25% and 3.25%. For a bigger dovish repricing the BoC would have to deliver a larger 50bps cut. That’s not say that yesterday’s BoC policy update was not dovish. The BoC continued to leave the door wide open to further rate cuts at upcoming policy meetings. Governor Macklem stated that the BoC discussed multiple scenarios for the path of rate cuts moving forward including the possibility of 50bps cuts. He added that if the economy and inflation were markedly weaker than their forecasts, “it could be appropriate to take a bigger step, something bigger than 25bps”. Similar to the Fed’s recent communication, the BoC appears more concerned over labour market weakness after employment growth stalled recently. The BoC added that “we need to increasingly guard against the risk that the economy is too weak and inflation falls too much” with inflation getting closer to target. Overall, the BoC’s dovish policy outlook continues to pose downside risks for the Canadian dollar alongside the ongoing drop in the price of oil which has fallen back towards USD70/barrel. It is resulting in the Canadian dollar underperforming against other non-USD G10 currencies.

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
EC	08:30	IHS S&P Global Construction PMI (MoM)	Aug	--	41.4	!
UK	09:30	Construction PMI	Aug	54.6	55.3	!!!
AU	10:00	RBA Gov Bullock Speaks	--	--	--	!
EC	10:00	Retail Sales (MoM)	Jul	0.1%	-0.3%	!
US	12:30	Challenger Job Cuts	Aug	--	25.885K	!
US	13:15	ADP Nonfarm Employment Change	Aug	144K	122K	!!!
US	13:30	Initial Jobless Claims	--	231K	231K	!!!
US	13:30	Nonfarm Productivity (QoQ)	Q2	2.3%	0.2%	!!
US	13:30	Unit Labor Costs (QoQ)	Q2	0.9%	4.0%	!!
US	14:45	Services PMI	Aug	55.2	55.0	!!!
US	15:00	ISM Non-Manufacturing Business Activity	Aug	--	54.5	!

Source: Bloomberg