Why is the Japanese Yen surrendering gains in risk-off markets ahead of NFP?

• Buying interest lifts USD/JPY towards 158.30 following a rebound from lows of 157.26.
• Risk-averse sentiment underpins the US Dollar as markets anticipate a robust US NFP report later in the day.
• Further Yen gains remain possible, according to OCBC experts, against the backdrop of the AI sell-off and Japanese portfolio rebalancing.

A risk-off mood has fuelled safe-haven demand for the US Dollar (USD), erasing the Japanese Yen’s (JPY) earlier gains as investors prepare for a strong US Nonfarm Payrolls (NFP) report later on Friday. Having recovered from lows of 157.26, USD/JPY is trading around 158.30 and heading for a second straight weekly advance. Nevertheless, the pair remains confined to the trading range established over the past four weeks.

Friday’s technology-led equity sell-off has driven traders towards safe assets, including US Government Bonds and the US dollar. Behind the retreat are concerns that the Democratic sweep in the US midterms will bring stricter AI industry regulation and the cancellation of plans for additional data centres.

Could a strong US Nonfarm Payrolls report reinforce rate-hike expectations?

Expectations of a robust US NFP release are also in focus, as the report could bolster the argument for another Federal Reserve rate hike in December. Consensus estimates point to net employment growth of 65K in October, compared with 29K in September. However, encouraging Jobless Claims and ADP Employment Change data published earlier this week have raised hopes that the payrolls figure could exceed expectations. 

The broader backdrop nevertheless remains supportive of the Yen, with markets expecting the Bank of Japan (BoJ) to continue tightening monetary policy and a December rate increase still firmly in contention. Reinforcing those expectations, the minutes of the BoJ’s September meeting showed that policymakers saw a need for further interest rate increases, while some advocated a steeper tightening cycle. 

On the outlook for the Yen, OCBC strategists observe that “more frequent US-centric AI volatility in 2027 could strengthen its (JPY) hedge appeal.” Another factor highlighted by OCBC is that “the other potential JPY catalyst is Japanese portfolio rebalancing,” as markets prepare to scrutinise “GPIF’s July-September results for signs of a shift towards domestic assets.” In a note, OCBC experts argue that if “GPIF and other Japanese investors bring more money home or increase FX hedging on overseas assets, an important source of structural JPY selling could fade,”