The USD/JPY pair moved higher on Friday, utilizing the yen’s weakness after domestic data. Ahead of the US session, the pair was trading more than 0.5% higher, rising above 122.40.
Japanese outlook worsens
Earlier in the session, Japan Tankan surveys for the first quarter were released. The manufacturing index slipped from 10 to 9, but the outlook declined from 9 to 7. However, the large all industry CAPEX dropped more notably, falling from 9.3% to 2.2%. The outlook among large manufacturers also fell notably.
The Japan chief Cabinet Secretary Matsuno said that he believes that the BoJ Tankan survey shows that economy is looking upward overall, but issues from pandemics remain.
Not many firms responded to the Tankan talking about the direct impact of the Ukraine war, though the crisis likely affected firms via a rise in raw material costs. Tankan japan firms’ inflation forecast one year ahead, at 1.8%, its highest on record.
US labor market eyed
However, investors will pay the most attention to the US labor market data. The non-farm payrolls number (new jobs in the US) is expected to print 490,000 for March, down from 678,000 in February, but still a solid figure. As a result, the unemployment rate will likely improve a notch to 3.7%. Moreover, wage growth is seen accelerating further in March but is still below inflation. Thus, real wages are declining.
Volatility will likely be elevated after the data. However, the release should help markets cement expectations around two 50bp hikes in May and June, which could further support the dollar, economists at ING report.
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The US yield curve has continued to flatten, as the 2-year yield to the same level as the 10-year yield, both consolidating somewhere around 2.4%. Rising interest rates are generally bullish for the USD/JPY pair.
Economists at TD Securities see 120 as a floor for the time being and forecast a return to 125 in the second quarter.
“A return to 125 remains the anchor point, but an even more aggressive Fed could easily push the pair further above,” they said.
The significant resistance is located in the 125 region, where highs from 2007 and 2015 are converged. If the USD jumps above that level, massive stop-losses could be hit, likely sending the pair toward its 2002 highs near 135.