USD/JPY subdued to the south of 116.00 level as focus turns to Friday’s key US jobs report

• USD/JPY continues to trade to the south of the 116.00 level on Thursday, having failed to rally post-hawkish Fed minutes.
• Long-term US yields will need to continue pushing higher if USD/JPY is to test late-2016 highs above 118.00.
• US 10-year yields are up sharply on the week, but are yet to break above 2021 highs around 1.77%.

After briefly moving back above the 116.00 level on Wednesday, but failing to test Tuesday’s multi-year high at 116.40, USD/JPY has gradually slipped lower on Thursday and has spent the last few hours going sideways in the 115.70s area. The pair, which has thus far failed to garner any impetus in wake of a more hawkish than expected Fed minutes release on Wednesday despite it sending US yields sharply higher across the curve, has found support in the form of Wednesday’s low close to 115.60. Below that, technicians note further support in the form of the November 2021 and February 2017 highs at 115.50.

Some FX strategists are surprised at the dollar’s failure to pick up in wake of the Fed minutes that clearly showed a strong appetite at the Fed for a fairly swift rate hiking cycle coupled with prompt balance sheet reduction. US data has been mixed this week in the run-up to Friday’s official December labour market report and not influenced FX markets too much. The labour market data already out this week continues to endorse the idea that the US labour market is very tight and businesses are continuing to struggle with personnel/skills shortages, something Friday’s data is expected to confirm. Tokyo Consumer Price Inflation figures out during Friday’s Asia Pacific session are unlikely to move the pair given that inflationary pressure in Japan remains highly subdued and unlikely to force the BoJ into deviating from its ultra-dovish policy stance any time soon.

Some have suggested that USD bulls might be keeping their powder dry ahead of the jobs report, which if as expected, might give them the green light to chase the dollar higher. However, with the yen the most sensitive G10 currency to rate differentials, long-term US yields will likely need to resume their march higher if USD/JPY is to surpass recent highs and test late-2016 highs above 118.00. Speaking of, the US 10-year poked above 1.70% on Thursday and is up over 20bps on the week, but the key level being watched by bond market participants is the 2021 high at 1.77%.