US Dollar relinquishes some post-NFP gains as Japanese Yen strengthens

• Broad US Dollar weakness lifts the Japanese Yen, leaving USD/JPY lower at the start of the week.
• Lower Oil prices temper US inflation worries, pulling the 10-year Treasury yield towards a two-month low.
• US inflation releases are in focus for signals on a December Fed rate rise as the BoJ indicates room for additional tightening.

Trading at around 157.91 at the time of writing, USD/JPY is 0.36% lower on the day as the week gets under way. Widespread selling of the US Dollar (USD) is underpinning the Japanese Yen (JPY).

West Texas Intermediate (WTI) is trading at around $86 a barrel, a daily decline of more than 3%. Oil has extended its losses after US President Donald Trump played down the prospect of further strikes on Iran, adding to pressure on the Dollar.

With crude retreating, inflation concerns have eased somewhat, helping to restrain US Treasury yields. At 4.83%, the benchmark 10-year US Treasury yield is 0.33% lower on the day and close to a two-month low.

Having reached 102.36 in the wake of Friday’s stronger-than-expected US employment report, the US Dollar Index (DXY) is now trading around 101.80. The index measures the Dollar against a basket of six major currencies.

October’s US Nonfarm Payrolls (NFP) increased by 165K, more than twice the forecast of 65K, as the Unemployment Rate slipped from 4.2% to 4.1%. Those readings have bolstered expectations that the Federal Reserve (Fed) will raise rates again. Traders now assign roughly an 80% probability to a quarter-point increase in December.

Commenting on the partial reversal of the Dollar’s post-payrolls rise, Brown Brothers Harriman’s Elias Haddad notes: “USD pared back some of Friday’s strong October non-farm payrolls gains.” On the outlook, he adds that “robust US economic activity, favorable labor market conditions and sticky underlying inflation back the Fed’s hawkish bias, keeping rate differentials supportive of USD,” lending weight to the view that forthcoming US releases will play a crucial role in determining expectations for the Fed’s policy path.

Tuesday brings the US Consumer Price Index (CPI), with the Producer Price Index (PPI) to follow later in the week. Should CPI exceed expectations, bets on a rate rise could gather strength and offer some support to the Dollar.

The Bank of Japan (BoJ), meanwhile, continues to pursue gradual monetary tightening. Although it left its policy rate unchanged at 1.25% in October, the central bank indicated a willingness to raise rates again. A rise to 1.50% was favoured by Board member Hajime Takata, while Governor Kazuo Ueda cautioned that inflation could exceed the BoJ’s 2% target.

In a separate development, Reuters reported that Japan’s Finance Ministry revealed on Monday that authorities had spent ¥7.98 trillion purchasing Yen on 30 July, the largest amount for a single day. That sizeable intervention helps account for traders’ continued caution about further action when USD/JPY rises.