US dollar stable on weak US employment data; yen weakens to start the week

US dollar stable on weak US employment data; yen weakens to start the week

In response to two episodes of alleged Japanese government intervention, the yen last week saw its largest weekly increase in over 17 months, lifting the currency from a 34-year low of 160.245 per dollar.

The yen began the week somewhat lower, but the dollar remained mostly stable on Monday as expectations that the Federal Reserve will still reduce rates twice this year were reinforced by a dismal U.S. employment data.

In response to two episodes of alleged Japanese government intervention, the yen last week saw its largest weekly increase in over 17 months, lifting the currency from a 34-year low of 160.245 per dollar.

Following the employment report, the dollar lost further ground, and the yen fell 0.43% to 153.62 per dollar in early trading on Monday. On Friday, it reached a three-week high of 151.86.

Mainland Last week, China's markets were closed for three days. However, the widespread decline in the dollar after statistics showing a weakening U.S. employment market, Fed Chair Jerome Powell reaffirming the central bank's easing stance, and Japan's intervention to drive up the yen had caused the offshore yuan to increase.

The offshore yuan increased by more over 1% last week, closing at 7.1959 per dollar.

Britain and Japan are also closed on Monday for holidays, which is probably why there will be fewer people. However, traders will be very vigilant throughout the day since Japanese authorities chose to interfere in the yen market during the calm times of the previous week.

According to economists, the Bank of Japan's anticipated expenditure of over 9 trillion yen to support the weak yen last week has only temporarily strengthened it, as the market still sees the currency as a sell.

In the week ending April 30, non-commercial traders—a group that includes hedge funds and speculative trades—reduced their yen short positions to 168,388 futures contracts, which is still relatively close to their largest bearish positions since 2007. This information was revealed in the Commodity Futures Trading Commission's weekly commitments of traders report.

Goldman Sachs analysts note that while Japan is certainly capable of intervening further, the overall macro backdrop is still quite unfavorable for the yen, and that the "success" of interventions can only be limited.

"But, buying time is still valuable, as it reduces the capacity for economic disruptions from the exchange rate adjustment as well as could stabilize the currency until the economic backdrop becomes more favorable for JPY," they said in their note.

FED TRAIL

Data released on Friday revealed that, despite evidence of a slowing labor market, expectations that the US central bank may implement a "soft landing" for the economy were boosted. U.S. employment growth slowed more than anticipated in April, and annual pay growth dropped below 4.0% for the first time in over three years.

As of right now, markets have completely factored in 45 basis points of rate cuts this year, including a November reduction.

As anticipated, the Fed kept interest rates unchanged at the end of its two-day meeting on monetary policy, but it did indicate that it was still inclined to eventually drop rates, even if it could take longer than anticipated.

"While inflation is likely staying closer to 3% than 2% this year, we project just enough reduction in inflation to meet the Fed's bar for a summer rate cut," a report from Citi analysts said.

"The case for cuts will be much stronger if we are legitimate that softer April jobs are a sign of a greater weakness to come."

The dollar index, which compares the value of the US dollar to six competitors, was at 105.12 on Friday after hitting a three-week low of 104.52.

The pound was last seen at $1.2547, up 0.02% on the day, while the euro was up 0.07% at $1.0765.