USD/JPY Stuck Within Bull-Flag Formation Following Lackluster NFP

Talking Points:

- USD/CAD Extends Lower Highs & Lows Following Steller Canada Employment Report.

- USD/JPY Pops Following Mixed NFP Report; Bull-Flag Formation Continues to Take Shape.

USD/CAD Daily

USD/CAD Daily

 

Chart - Created Using Trading View

• USD/CAD may continue to work its way back towards the December low (1.3080) as it extends the recent series of lower highs & lows following the 53.7K pickup in Canada Employment, which was led by a 81.3K rise in full-time positions; the uptick in the Ivey Purchasing Managers Index (PMI) also instills an improved outlook for the region as it climbs to 60.8 in December to mark the second-highest reading for 2016.
• The slew of positive developments are likely to encourage the Bank of Canada (BoC) to retain the current policy at the January 18 meeting, but Governor Stephen Poloz and Co. may continue to change their tune and show a greater willingness to gradually move away from its easing-cycle as the economy is ‘expected to grow at a rate above potential starting in the second half of 2016, supported by accommodative monetary and financial conditions and federal fiscal measures.’
• Broader outlook for USD/CAD remains constructive as it continues to operate within the upward trending chancel carried over from the previous year, but a break/close below 1.3160 (61.8% retracement) raises the risk for a test of the December low (1.3080), which lines up with the 200-Day SMA at 1.3100.

USD/JPY Daily

Chart - Created Using Trading View

• USD/JPY pared the decline from earlier this week even as the U.S. Non-Farm Payrolls (NFP) report showed a 156K expansion in December; despite the weaker-than-expected headline print, Average Hourly Earnings climbed an annualized 2.9% to mark the fastest pace of growth since June 2009, and signs of stronger household earnings may keep the Federal Open Market Committee (FOMC) on course to further normalize monetary policy in 2017 as ‘many participants judged that the risk of a sizable undershooting of the longer-run normal unemployment rate had increased somewhat and that the Committee might need to raise the federal funds rate more quickly than currently anticipated to limit the degree of undershooting and stem a potential buildup of inflationary pressures.’
• In turn, Minneapolis Fed President Neel Kashkari, Fed Governor Jerome Powell, Philadelphia Fed President Patrick Harker, Chicago Fed President Charles Evans and Chair Janet Yellen (all 2017-voting members) may strike a more hawkish tone over the days ahead, but the central bank may revert back to a wait-and-see approach at the next interest rate decision on February 1 as officials persistently argue ‘the actual path of the federal funds rate would depend on the economic outlook as informed by incoming data.’
• Longer-term outlook for USD/JPY remains tilted to the upside especially as the RSI appears to be responding to the bullish formation carried over from the previous year, and the pair may continue to consolidate before staging a larger advance as a bull-flag formation appears to be in play.