JPY supported by US tech sell-off & jump in job layoffs

USD: Jump in layoffs attracts more attention as another NFP report is delayed

The US dollar has lost upward momentum at the end of this week after running into important technical resistance at just above the 100.00-level for the dollar index which is the top of the 96.000-100.00 range that has been in place since April/May. The US dollar corrected lower yesterday after the release of the US Challenger job cuts survey revealed a sharp jump in layoffs in October. While monthly job layoffs can be volatile, Bloomberg highlighted that it was the most job cuts for any October in more than two decades. Challenger stated that “some industries are correcting after the hiring boom of the pandemic, but this comes as AI adoption, softening consumer and corporate spending and rising costs drive belt-tightening and hiring freezes. Those laid off now are finding it harder to quickly secure new roles, which could further loosen the labour market”. The layoffs were driven by the technology and warehousing sectors. The Challenger survey triggered a bigger than normal market reaction in light of the ongoing government shutdown which has delayed the release of the nonfarm payrolls reports for September and October. It has contributed to the 2-year US Treasury yield dropping sharply by around 5bps yesterday although it still remains around 8bps higher than prior to last week’s hawkish FOMC policy update at which Fed Chair Powell pushed back against expectations for another 25bps rate cut as soon as next month. The Fed has indicated that it would prefer to leave rates on hold in December if they are unable to gain more clarity on the health of the US economy and labour market by then. The timing of when the record government shutdown comes to an end remains important for US dollar performance. The absence of economic data on the health of the US economy has been a supportive factor for the US dollar.

At the same time, the move lower in yields and the US dollar at the end of this week has been driven in part by the sell-off for US AI/tech stocks. The Nasdaq composite index declined by -1.9% yesterday extending it’s correction lower from the peak late last month to just over 4%. It has been the deepest correction lower since April which marked the worst point for risk assets this year triggered by President Trump’s Liberation Day tariffs announcement. The Nasdaq has since staged a sharp rebound rising by around 63% from the low point in April to the high at the end of last month. The deterioration in global investor risk sentiment this week alongside the move lower in global yields has helped the yen to rebound. It is on course to be the best performing G10 currency this week.  

US TECH SELL-OFF HAS HELPED JPY TO REBOUND

Source: Bloomberg, Macrobond & MUFG GMR

JPY: Yen stages modest rebound after heavy sell-off last month

After peaking at 154.48 at the end of last month, USD/JPY has dropped back towards the 153.00-level this week. The yen’s gains have been more evident against the high beta G10 commodity currencies reflecting the deterioration in investor risk sentiment. The yen appears to have benefitted from a safe haven bid this week following last month’s heavy sell-off triggered by the domestic politics. The sell-off for US AI/tech stocks, jump in US challenger job layoffs and weaker than expected trade report from China overnight have contributed to more caution amongst global investors. The trade report revealed that exports from China fell by -1.1%Y/Y in October which was the first drop in eight months. Import growth slowed as well to an annual rate of 1.0%. Exports to the US were the biggest drag falling by -25.1% and exports to non-US exports weakened significantly as well. It has cast some fresh doubt on the resilience of China’s economy to withstand trade disruption from Trump’s tariffs. One caveat is that large swings in annual export growth reflect in part payback from front-loaded production ahead of October’s Super Golden Week holiday as well as a base effect. At the same time, the recent extension of the trade truce between the US and China by 12 months including a 10% reduction in tariffs applied to imports from China should help to ease downside risks to trade and growth.  

Domestic developments in Japan have had less impact on the yen this week. New Prime Minister Takaichi was speaking in the lower house of parliament overnight. She stated “it’s fair to think that economic policy has changed”. She noted that the government’s target of achieving a primary balance surplus will no longer be viewed on a single-year basis, but the strategy may be revised to aim for a balance over several years. The change would potentially allow the government more flexibility to run looser fiscal policy and consider multi-year budgets. She added that “I’d like to take a slightly longer-term view of how I will mange finances from now on”. It was also reported earlier this week that her Council on Economic and Fiscal Policy (CEFP) is set to include former BoJ Deputy Governor Masazumi Wakatabe who is known for his reflationist views, and Toshihiro Nagahama who is the Chief economist of Dai-Ichi Life Research Institute. Toshihiro Nagahama recently argued in a report for a shift in fiscal targets from the primary balance surplus to the ratio of government debt to GDP. The appointments would send another signal that Prime Minister Takaichi is strongly committed to implementing her plans for “responsible and proactive fiscal policy”. Market expectations for looser fiscal and monetary policies to provide more support for growth in Japan were an important reason why the yen weakened sharply last month.

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com