Investing.com – The dollar versus yen bet was a hot currency trade that dominated flows, but the trade could now take a “treacherous” path, warns Macquarie, as Japan is likely to follow suit. As a result of intervention last week, which led to a sharp rise in the value of the Japanese currency amid renewed expectations of a rate cut in the United States.
“It is tactically treacherous to go long,” Macquarie said on Monday, warning that Japan’s Treasury would likely intervene again if it “sees some likelihood of a peak in the yield differential between the U.S. and Japan,” leading to the valuation yen after Friday’s US jobs report.
A weaker-than-expected April jobs report released on Friday revived hopes of a quicker rate cut, with overnight swap markets now expecting a rate cut in September rather than December as the economy not only created fewer jobs last month than expected, but wage growth also slowed.
Data showing that labor supply and demand are coming into better balance, justified Fed Chairman Jerome Powell’s recent remarks that the labor market is not as tight as
That used to be the case, Macquarie added.
Following a sharp increase in labor supply caused by forces of immigration influx, the focus must now shift from “job growth to employee turnover and wage rates to evaluate Fed position,” Macquarie said.
This new paradigm of supply and demand in the labor market has helped prop up wage bills and make the labor market more competitive by curbing wage growth and labor turnover, which is at odds with a cooling labor market.
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“We’re almost sure what is this cooler labor market than a year ago. But it’s not about the job growth numbers; this is in effect turnover and wage figures,” Macquarie added.
Further signs of a cooling labor market in the coming months could boost hopes of a rate cut and prompt bets that U.S. Treasury yields have peaked, opening the door to further intervention from Japan to boost the yen.
However, the latest data shows yen short sellers have not been forced to bow to Japan’s recent impromptu foray into the foreign exchange market amid expectations that rate hikes rather than intervention are needed to stem the yen’s fall.
There was only “small reduction” in speculative short positions in JPY as CFTC reports on traders’ positions last week, Macquarie said, making it clear that those long positions in USD/JPY did not appear to be too much scared by currency interventions by the Japanese Ministry of Finance and the Bank of Japan.”
But the risk of further intervention could eventually shake out dollar buyers against the yen as The risk-reward profile of “going long USD/JPY has become even less attractive,” Macquarie said. “We suspect that more speculators will be forced to close long positions on the USD/JPY pair at the end of last week and this week,” he added.