USD/JPY nudges back above 104.00 level as US yields rally

• US yields have risen and the yield curve steepened since softer than expected US jobs data, pushing USD/JPY higher.
• USD/JPY has climbed above 104.00, with risk on equity market flows also supportive.

USD/JPY has risen back above the 104.00 level in wake of Friday’s US labour market report for November. The pair is off 104.23 highs but still trades with gains of around 30 pips of 0.3% on the day.

Rising US yields, risk-on flows hurt JPY

The US economy added just 245K jobs in November according to the Bureau of Labour Statistics (BLS), and though the unemployment rate dropped to 6.7% from 6.9%, this was due to a decline in the participation rate to 61.5% from 61.7%. BLS said that 3.9M Americans were prevented from looking for work in November due to the pandemic, up from 3.6M in October.

However, Friday’s downbeat data has been taken as good news by the market; the S&P 500 has rallied to fresh all-time highs and US government bonds have sold off, with the 10-year yield rising 5bps to 0.97%, while the curve has also steepened with the 2s/10s also rising about 5bps to 0.816%. Soft jobs data is being seen as making near-term US fiscal stimulus more likely, given the pressure it puts on Congress to act swiftly to avert a further slowdown in the labour market. Once Congress does act and deliver stimulus, the economy will recover faster, justifying the rise in stock prices (or so the logic goes…).

Risk on flows, in general, has weighed on haven FX on Friday; USD, CHF and JPY make up three of the bottom four G10 FX performers on the day. However, the US dollar is outperforming JPY as a result of the rise in and steepening of the US yield curve, which makes parking cash in US government bonds (and buying USDs to do so) more attractive relative to investing in Japanese Government Bonds.

USD/JPY rangebound

USD/JPY’s rise on Friday has signalled that the pair is now in a new range. To the upside, the 24 November and 2 December highs mark the top of the range in the 104.70s. Meanwhile, to the downside, the 18 and 23 November and 3 December lows in the 103.60s mark the bottom of the range.

USD/JPY one hour chart