Japanese yen plunges on NFP, Japan elections

USD/JPY has started the week with sharp gains and is trading at 137.60, up 1.12%.

The US dollar has gained ground against all of the majors on Monday, courtesy of the strong June non-farm payroll report on Friday. The markets were expecting a slowdown from the gain of 336 thousand in May. NFP outperformed with a gain of 381 thousand, crushing the estimate of 240 thousand. The unemployment rate remained steady at 3.6%, while wage growth grew by 0.3%.

Fed looking at 75bp hike

The solid employment numbers have paved the way for the Fed to go ahead with a supersize hike of 75bp at the end of July, which has given the US dollar an early-week boost. CME’s FedWatch has pegged a 75bp move at a whopping 93%, with a 7% likelihood of a full 100bp increase. Just a few months ago, a 50bp hike from the Fed was considered ‘supersize’, but now it barely raises an eyebrow. Such is the economic landscape we find ourselves in.

This week’s highlight is US inflation on Wednesday, and a weak CPI reading could put a dent in the Fed’s plan for a 75bp move. This isn’t likely to occur, as headline CPI is forecast to continue accelerating, from 8.6% to 8.8%. The US economy may be slowing slightly after a slew of rate hikes, but an inflation peak appears to remain elusive.

In Japan, the shocking news of the assassination of former Prime Minister Shinzo Abe on the weekend stunned the world. Japan’s ruling party secured an easy election win on Sunday, sending Prime Minister Fumio Kishida, who succeeded Abe, to his second term in office. Kishida will continue to support accommodative fiscal and monetary policies, which has driven the Japanese yen lower on Monday.

Japan’s household spending on Friday was a major disappointment. The consensus stood at a strong gain of 2.1% YoY for May, after a 1.7% decline in April. Instead, household spending came in at -0.5%, marking a third straight decline. The Bank of Japan has been trying to coax domestic demand higher with its loose monetary policy, but consumers haven’t bought in and are holding the purse strings tightly. 

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USD/JPY Technical

•  USD/JPY is testing resistance at 1.3760. 1.3892 is a strong monthly resistance line
• There is support at 136.84 and 133.82

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