The USD/JPY spiked to an intraday high of 125.01 yen per dollar on Friday, immediately after the U.S. Department of Labor released the non-farm payrolls report saying that the July jobs numbers came in with a 215,000 increase, down 11.52% year-on-year and below the Wall Street estimate of a 225,000 gain. The May and June numbers were revised up to 260,000 and 231,000, respectively, resulting in 14,000 more jobs gained during the periods. 

After the market digested the jobs data, traders began taking profits, which drove the USD/JPY to an intraday low of 124.10 yen per dollar, before pulling back to close at 124.22 yen per dollar. 

Wall Street economists said the July jobs report won’t stop the Federal Reserve from raising interest rates in September, as the Federal Reserve already made up their mind after the FOMC meeting on July 29, that it will hike the rate sooner rather than later this year. Bloomberg said the futures market is now pricing in an up-to-75% probability that the Federal Reserve will raise interest rates at the September 16-17 meeting. 

The Cabinet Office of Japan said on Monday that consumer sentiment dropped 1.4 points from the previous month to 40.3 in July, the biggest drop in 1½ years as consumers grew more pessimistic about income, employment and asset prices. Consumption accounts for 60% of Japan’s economy, meaning consumer sentiment and households’ purchasing power could be hit by the depreciating yen as the import costs rise. 

On June 10, the USD/JPY was ready for a 125 level breakout but ended up tumbling 1.34% to close at 122.66 yen per dollar after Bank of Japan (BoJ) Governor Haruhiko Kuroda told a group of Japanese legislators that the yen was unlikely to depreciate further. Mr Kuroda denied having any intention of putting a floor under the yen. Nonetheless, many currency strategists, including Marc Chandler, global head of currency strategy at Brown Brothers Harriman, seem to think that 125 was a near-term top. 

As of August 4, there are 107,172 short positions of Japanese yen (CME:6J), traded on the Chicago Mercantile Exchange (CME), by leveraged funds, an increase of 14,343 contracts since last week. This is compared to about 26,482 long positions, an increase of 3,017 contracts during the same period, according to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) each Friday. 

Leveraged funds might have increased their short positions in anticipation of a strong U.S. July jobs report and an expansion of the BoJ asset-purchase program, as the net short positions have increased about 11,326 contracts, where Japanese yen contracts are traded in units of 12,500,000 Japanese yen.

Technically, the USD/JPY has been trading in an up-trend channel since the end of 2014. The currency pair was unable to break out the 125 yen per dollar level as the U.S. economic data have been mixed while the Japanese economy continues to recover moderately. The BoJ decision on Friday to maintain its monetary stimulus at an annual pace of about 80 trillion could send a signal to the currency markets that the BoJ may want to keep the currency pair at this level for now. We expect the USD/JPY to pull back to the 122 yen per dollar level if the forward looking U.S. economic data remain mixed.