Japanese Yen strengthens as US Dollar gives back part of its post-NFP gains

• USD/JPY opens the week under pressure, with the Japanese Yen gaining support from widespread US Dollar weakness.
• The 10-year Treasury yield slips towards a two-month low as cheaper Oil tempers US inflation worries.
• US inflation releases are in focus for signals on a December Fed rate hike, as the BoJ indicates room for additional tightening.

USD/JPY is under pressure at the start of the week, with the Japanese Yen (JPY) supported by a broadly weaker US Dollar (USD). The pair stands at around 157.91 at the time of writing, a decline of 0.36% for the day.

Further losses in Oil prices are weighing on the Greenback after US President Donald Trump played down the prospect of fresh strikes on Iran. Down more than 3% on the day, West Texas Intermediate (WTI) is trading at around $86 a barrel.

With lower crude prices alleviating some inflation worries, US Treasury yields remain contained. At 4.83%, the benchmark 10-year US Treasury yield has fallen 0.33% on the day and is close to a two-month low.

After reaching 102.36 in the wake of Friday’s better-than-expected US jobs report, the US Dollar Index (DXY) is trading near 101.80. The index measures the Greenback against a basket of six major currencies.

October’s US Nonfarm Payrolls (NFP) increased by 165K, exceeding the 65K forecast by more than double, as the Unemployment Rate eased from 4.2% to 4.1%. These readings bolster expectations of a further Federal Reserve (Fed) rate hike. Traders now assign roughly an 80% probability to a quarter-point rise in December.

According to Brown Brothers Harriman’s Elias Haddad, the Dollar has given up some of its gains following the payrolls release: “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,” underscoring the view that forthcoming US releases will play a crucial role in shaping expectations for the Fed’s policy trajectory.

Tuesday brings the US Consumer Price Index (CPI), with the Producer Price Index (PPI) scheduled for later in the week. Should CPI exceed expectations, bets on a rate hike could firm up, offering some support to the Dollar.

Meanwhile, gradual policy tightening remains the course for the Bank of Japan (BoJ). Although it left its policy rate unchanged at 1.25% in October, the central bank indicated its readiness for further increases. 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 said on Monday that authorities had purchased ¥7.98 trillion worth of Yen on July 30, setting a single-day record. The size of that intervention helps account for traders’ continued caution over further action as USD/JPY rises.