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James Hyerczyk
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USD/JPY

In a pure interest rate-differential play, the Dollar/Yen surged to its highest level since March 26 on Friday after a government report showed the U.S. unemployment rate unexpectedly fell in May and layoffs abated. Some analysts interpreted the Labor Department report to mean the economic downturn caused by the COVID-19 pandemic was bottoming.

On Friday, the USD/JPY settled at 109.594, up 0.428 or +0.39%.

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The U.S. Labor Department’s closely watched monthly employment report showed the jobless rate dropped to 13.3% last month from 14.7% in April. Nonfarm payrolls rose by 2.509 million jobs after a record plunge of 20.687 million in April.

Economists polled by Reuters had forecast payrolls falling by 8 million jobs. They had expected the survey of households to show the unemployment rate jumping to 19.8%.

“The country has turned the corner from the pandemic and the recession it created for now, but all the workers who lost their paychecks will find it difficult to regain their place in society as many of these jobs are gone forever,” said Chris Rupkey, chief economist at MUFG in New York.

“It took years for the economy to grow enough to finds jobs for those unemployed in the last recession, and it will take years again this time to do the same.”

10-Year Treasury Yield Surges Above 0.9% after Better-Than-Expected Jobs Report

Treasury yields surged on Friday after jobs data for May blew past expectations.

The yield on the benchmark 10-year Treasury note popped 11 basis points to 0.926%, the highest level since March 24. The benchmark rate has risen about 30 basis points this week alone, on pace for its best weekly performance since late February.

The yield on the 30-year Treasury bond also jumped about 10-basis points to 1.723%. Yields move inversely to prices.

U.S. government bond yields had begun to push higher Thursday after the European Central Bank announced higher-than-expected purchases of Euro Zone debt.

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Short-Term Outlook

The USD/JPY has more upside potential, but robust demand for risky assets has to continue in order for the Forex pair to reap those potential gains.

When demand for risk rises, traders sell safe-haven assets like the Japanese Yen, Treasurys and gold. When Treasurys decline, interest rates move higher. When US rates move higher, the U.S. Dollar becomes a more attractive asset since Japanese interest rates are negative.

A steep sell-off in stocks caused by bearish economic data or worries over a second wave of coronavirus will encourage investors to trim their positions in risky assets. The money will then flow back into the safe-havens and the USD/JPY will likely weaken somewhat.

For a look at all of today’s economic events, check out our economic calendar.

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