Event to watch today:
16:45 EET. USD — Composite PMI
USDJPY:
USDJPY is facing a changing short-term balance after comments from Tokyo. Finance Minister Satsuki Katayama said that authorities were ready to respond to currency moves at any time if necessary and remained in contact with their US counterparts. The remarks followed a sharp strengthening of the yen, which had earlier reached a multi-year low during the week. This increases the relevance of the risk of official action.
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At the same time, the June US employment report weakened the case for an early Federal Reserve rate hike. Employment increased by only 57,000 against expectations of 110,000, while short-term US Treasury yields declined. Reduced interest rate support for the US dollar is important for a pair where the rate differential has been a key source of demand for the US currency. A member of Japan’s government advisory panel also called on the Bank of Japan to continue gradually raising rates.
The wide rate differential still limits the potential for sustained yen strength, and Japanese authorities have not confirmed any intervention. However, the combination of weaker US labour market data and Tokyo’s official warning changes the balance of risks for USDJPY. Under the base-case scenario, further downside remains the preferred outcome while US Treasury yields do not return to growth.
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