Japanese Yen gives back gains on risk-off markets and with NFP on tap

USD/JPY appreciates to the 158.30 area after bouncing up from 157.26 lows.
The US Dollar is drawing support from risk aversion and market expectations of a strong US NFP report later in the day.
OCBC experts see potential for further Yen recovery amid the AI selloff and Japanese portfolio rebalancing.

The Japanese Yen (JPY) has reversed earlier gains with the US Dollar (USD) boosted by higher safe-haven demand amid the risk-averse mood, and with investors bracing for a strong US Nonfarm Payrolls (NFP) report later in Friday. The USD/JPY pair is trading at the 158.30 area after bouncing from 157.26 lows, and on track to its second consecutive weekly gain, but remains trapped within the last four weeks' trading range.

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Traders have flocked into safe assets like US Government Bonds and the US dollar amid a tech-led rout in equity markets on Friday, amid concerns that the Democratic sweep in the US midterms will lead to tougher regulation in the AI industry and cancellations in plans to build more data centres.

Markets await a strong US Nonfarm Payrolls report

Apart from that, the market is bracing for a strong US NFP report that might strengthen the case for another Federal Reserve rate hike in December. The market consensus foresees a 65K increase in net employment in October, up from 29K in September, although the upbeat Jobless Claims and ADP Employment Change figures released earlier this week have boosted expectations of a positive surprise.

From a wider perspective, however, the Yen remains supported by market expectations that the Bank of Japan (BoJ) will keep tightening monetary policy, with a December rate hike firmly on the table. The minutes of September’s BoJ meeting endorsed these hopes as policymakers showed the need for further interest rate hikes, with some of them calling for a steeper tightening cycle.

Looking ahead, strategists at OCBC note that “more frequent US-centric AI volatility in 2027 could strengthen its (JPY) hedge appeal.” OCBC adds that “the other potential JPY catalyst is Japanese portfolio rebalancing,” with markets set to watch “GPIF’s July-September results for signs of a shift towards domestic assets.” If “GPIF and other Japanese investors bring more money home or increase FX hedging on overseas assets, an important source of structural JPY selling could fade,” say OCBC experts in a note.

Economic Indicator

Nonfarm Payrolls

The Nonfarm Payrolls release presents the number of new jobs created in the US during the previous month in all non-agricultural businesses; it is released by the US Bureau of Labor Statistics (BLS). The monthly changes in payrolls can be extremely volatile. The number is also subject to strong reviews, which can also trigger volatility in the Forex board. Generally speaking, a high reading is seen as bullish for the US Dollar (USD), while a low reading is seen as bearish, although previous months' reviews and the Unemployment Rate are as relevant as the headline figure. The market's reaction, therefore, depends on how the market assesses all the data contained in the BLS report as a whole.

Why it matters to traders?

America’s monthly jobs report is considered the most important economic indicator for forex traders. Released on the first Friday following the reported month, the change in the number of positions is closely correlated with the overall performance of the economy and is monitored by policymakers. Full employment is one of the Federal Reserve’s mandates and it considers developments in the labor market when setting its policies, thus impacting currencies. Despite several leading indicators shaping estimates, Nonfarm Payrolls tend to surprise markets and trigger substantial volatility. Actual figures beating the consensus tend to be USD bullish.

Economic Indicator

Unemployment Rate

The Unemployment Rate, released by the US Bureau of Labor Statistics (BLS), is the percentage of the total civilian labor force that is not in paid employment but is actively seeking employment. The rate is usually higher in recessionary economies compared to economies that are growing. Generally, a decrease in the Unemployment Rate is seen as bullish for the US Dollar (USD), while an increase is seen as bearish. That said, the number by itself usually can't determine the direction of the next market move, as this will also depend on the headline Nonfarm Payroll reading, and the other data in the BLS report.