USD/JPY to 120

If there is one takeaway from Friday’s non-farm payrolls report it should be not to fight the trend in the U.S. economy or the U.S. dollar. For the past week, investors were skeptical about the Federal Reserve’s commitment to raising interest rates this year with many arguing that this month’s NFP report would encourage the central bank to be more patient. After today’s release however, it is clear that there is a strong underlying trend in the labor market and the U.S. economy that the Fed cannot ignore. Earlier this week, many traders took profit on their long dollar positions and there’s no better reason to buy dollars now than the latest NFP report. Central banks around the world have been easing monetary policy, making their currencies less attractive relative to the dollar. With concerns for a weak jobs number eliminated by today’s report, the dollar should see further gains in the coming week. In a nutshell, today’s strong report keeps the Fed on track to raise interest rates in the second half of the year. With only retail sales and the University of Michigan Consumer Sentiment Index scheduled for release next week, we expect the dollar to extend its gains against most of the major currencies, particularly given the sharp 14bp rise in 10 year Treasury yields.

Technically, Friday’s rally took USD/JPY out of a 2.5 week long consolidation. The next resistance or stop for the currency pair should be 120. We don’t see USD/JPY breaking back below 117, the current support level for the pair.