USD/JPY Fundamental Daily Forecast – Despite Jobs Report Miss Investors Remain Confident in Economy

The Dollar/Yen plunged on Friday to its lowest level since April 27 after a steep drop in yields tightened the spread between U.S. Government bonds and Japanese Government bonds (JGB’s) making the U.S. Dollar a less-attractive investment. The catalyst behind the sell-off was a U.S. jobs report for April that came in well below expectations.

On Friday, the USD/JPY settled at 108.603, down 0.478 or -0.44%.

The USD/JPY, however, rebounded off its low for the session as U.S. Treasury yields bounced back after hitting two-month lows on Friday following data that showed a much smaller-than-expected jobs gain in April, with yields on longer-dated debt rising for the session as investors remained confident the economy was on the road to a strong recovery.

Non-Farm Payrolls Surprise

Non-Farm Payrolls increased by only 266,000 jobs last month after rising by 770,000 in March, the Labor Department reported.

Economists polled by Reuters had forecast payrolls advancing by 978,000 jobs. The unexpected slowdown in job growth was likely due to shortages of workers and raw materials as the economy recovers from the coronavirus pandemic.

‘Knee-jerk Reaction’ in Treasury Yields

The benchmark 10-year yield, which dropped to 1.46%, the lowest since March 4, was last up 1.60 basis points on the day at 1.5771%, holding below a 14-month high of 1.776% reached on March 30.

The 30-year yield tumbled to its lowest level since March 1 at 2.158%. It was last 4.4 basis points higher at 2.28%.

The yield drop was a “knee-jerk reaction” that faded as the session wore on and the market digested the data, according to analysts.

The most closely watched part of the yield curve that measures the gap between yields on two- and 10-year Treasury notes was about 2 basis points steeper at 143.20 basis points.

U.S. interest rate futures indicated that traders pushed out expectations of a Fed rate hike by roughly three months after the payrolls report’s release.

Short-Term Outlook

USD/JPY traders will continue to monitor the movement in U.S. Treasury yields on Monday for direction. The headline employment data may have missed, but the news didn’t derail the economic recovery. Jobs are likely to continue to be added monthly with the pace of hirings picking up as the number of workers seeking jobs improves and more raw materials become available.

Despite a huge miss, which it was, it’s still employment going in the right direction,” said Andrew Richman, senior fixed income strategist at Sterling Capital Management.