Yen drifting ahead of household spending

The Japanese yen has been drifting for most of the week and is almost unchanged today, trading just shy of the 136.00 level.

Japan releases household spending on Friday. After a decline of 1.7% YoY in April, the key consumer indicator is forecast to bounce back in May with a gain of 2.1%. A strong turnaround would be good news for the Bank of Japan, which is trying to coax domestic demand higher by maintaining an ultra-loose monetary policy.

The Japanese yen has borne the brunt of the BoJ’s policy, with USD/JPY soaring about 18% since March 1^st. The yen has been at the mercy of the US-Japan rate differential. The aggressive Fed has sent US yields higher while the BoJ defends its yield curve control, with the result being a sharp depreciation in the Japanese currency. US yields fell on Wednesday, but somewhat surprisingly, the yen could not take advantage of the narrowing in the rate differential. There is increasing speculation that USD/JPY will breach 140.00, but the long USD/JPY could be a very risky move.

The FOMC minutes provided a hawkish message to the markets, but there was nothing really new here. Fed members indicated their concern that inflation expectations were accelerating and said that much higher rates could be required to rein in these expectations, even if this weakened the economy.

To his credit, Fed Chair Powell has been transparent with the markets in his message that he will do whatever is necessary to bring inflation back to the Fed’s target of 2%. Inflation remains stubbornly high and hit a 41-year high of 8.6% in May, with no sign of the sought-after inflation peak. The Fed meets next in late July, with the markets trying to get a read on whether the Fed will raise by 5obp or a second straight hike of 75 bp.

Will NFP shake up the yen?

It wasn’t too long ago that US nonfarm payrolls were the most hotly anticipated indicators, but NFP has taken a step back as inflation and Fed rate policy have become the main focus of the markets. Still, tomorrow’s NFP could be a market-mover, as investors may rely on it for guidance on the health of the US economy. The consensus for NFP stands at 275 thousand, after a gain in May of 390 thousand. If NFP misses expectations, investors could view it as a sign that the economy is losing steam. That could mean that the Fed will ease up on rate hikes, which would put downward pressure on the US dollar.

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