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The USD/JPY has risen this week as the U.S. dollar staged a comeback across the board. However, it remains to be seen whether the rebound will last very long today.
I will be closely watching the reaction to the U.S. nonfarm jobs report, scheduled for later, to see whether market participants decide to put their “risk-on” caps back on or remain in “risk-off” mode following the big sell-off in the US technology sector on Thursday.
Normally, the jobs report has a big impact on the direction of the dollar, especially on occasions when the headline number deviates from expectations by a significant margin. But since the pandemic, the greenback has become more sensitive to the “risk-on, risk-off” trade than macro data. Risk-on is when stocks rally along with commodities, and this tends to boost the appetite for commodity dollars and other foreign currencies, causing the dollar to go lower.
The fact that the dollar has been behaving this way is mainly a reflection of investor expectations that the Fed will keep monetary policy loose for a long time and individual data releases will not materially impact their thinking much, and therefore the direction of interest rates. So, today’s jobs data will need to be seen from the viewpoint of the Fed’s policymakers.
Unless it is very bad or very good, anything in-between is unlikely to cause too much of a reaction in the dollar in the way you would normally expect it to. Thus, for FX traders it may be worth paying closer attention to U.S. index futures, including the Dow Jones, S&P 500 and NASDAQ, and how they respond to the jobs report, before deciding on the direction for the dollar.
From a technical point of view, the USD/JPY remains in consolidation mode. But soon it could stage a breakout in one or the other direction, and the motion could potentially start with the jobs report today.
The USD/JPY has fallen in the previous two weeks before rebounding this week. On Thursday, though, it created a doji-like candle on the daily time frame, potentially suggesting the rebound has run its course. Thus, what I am looking for today is a clean break below Thursday’s low and support at 106.00. Should that happen then a drop towards the key 105.00 handle would become very likely.
But given the weekly lower highs and the general direction of the dollar for the past few months, the potential sell-off could go much deeper over time.
That said, I would drop my bearish view on this pair in the short-term, in the event rates break last week’s high around 106.95 on a daily closing basis. For if that happens, it would indicate the bearish pressure is weak and therefore no reason to expect a big drop.
But as traders, we should let the market decide what it wants to do, especially as it is a NFP day today. The market’s reaction to news is always more important than the news itself. So, if, after the jobs report is released, the USD/JPY goes down below 106.00 and stays lower, then I would be more inclined to short the USD/JPY pair, regardless of how good or otherwise the data is, for the reasons stated above.