US recap: Dollar holds jobs boost, yen sold on Fed-BoJ risk reset

Dec 11 – The dollar index rose 0.13% in the wake of Friday’s upbeat payrolls report that catalyzed the frantic reversal of USD/JPY’s implosion Thursday on unrealistic BoJ rate hike speculation and aggressive Fed rate cut pricing.

Now, markets are shifting their attention to US CPI on Tuesday and Wednesday’s Fed meeting conclusion. Treasury yields and dollar off late after solid Treasury auctions.

USD/JPY rose 0.9% to nearly halve its enormous 151.92-141.60 plunge from November’s highs at 2022’s 32-year peak. It erased the bulk of Thursday’s 3.8% dive and overpricing of a near-term BoJ rate hike and aggressive Fed rate cuts

BoJ Governor Kazuo Ueda’s comments on Thursday regarding possible rate hikes were misconstrued by some as pointing to the risk of a hike at next week’s meeting. That view was further disabused by a Bloomberg report that BoJ officials see little need to rush into scrapping negative interest rates this month as they have not seen enough evidence of wage growth to justify sustainable inflation.

Futures don’t even have a 10bp hike priced in until April, which would be after spring wage negotiations, and FY 2024-5 plans would be available.

The key for USD/JPY and most dollar pairings remains the path of Fed policy. In the wake of Friday’s jobs data and ahead of CPI on Tuesday, the Fed on Wednesday, and retail sales on Thursday, futures now favor a first Fed hike in May, rather than March, with four hikes by year-end instead of the five recently priced in.

EUR/USD was flat, perhaps partly reflecting angst about China’s deflating economy, 130bp of ECB cuts priced in for 2024 and worries about Ukraine’s ability to fund its defense against Russia’s invasion.

Sterling was flat, giving up earlier gains, ahead of US event risks, Tuesday’s UK jobs data, and Thursday’s BoE and ECB meetings. BoE’s first cut is favored for June, with 75bp total next year.

Aussie fell 0.15% amid higher Treasury yields, Chinese deflation, and tumbling energy prices, with USD/CNH up 0.1% to its highest since Nov. 20.

(Editing by Burton Frierson; Randolph Donney is a Reuters market analyst. The views expressed are his own.)