AUD/JPY Bulls Eye Breakout as Payrolls Loom

• Ascending triangle keeps upside favoured
• BOJ leak delivered little new information
• Household spending remains Japan's weak link
• Strong payrolls could hammer the yen

Triangle Tightens

AUD/JPY looks like it wants to break higher, continuing to coil beneath resistance within an ascending triangle structure on the daily chart. While a bearish engulfing candle earlier this week saw the price briefly retest uptrend support, buyers quickly re-emerged, keeping the broader bullish structure intact.

Given the prevailing trend, buying dips remains preferred to selling strength. Another pullback towards the uptrend, say beneath 114, would make for a decent entry level for longs, allowing trades to be set with a tight stop beneath for protection targeting 114.70. Should that target be achieved, the option would be there to hold, cut or reverse, depending on the price action at the time.

Source: TradingView

BOJ Hawkish Surprise? Not Quite

While reports on Thursday suggested the BOJ remains on track to raise rates later this month, unless there's a sharp escalation in the Middle East conflict, that's not exactly "new" news. Before the reports emerged, markets already had a June rate hike largely priced along with two full increases baked into the cake by year-end.

That neutralised the initial impact, likely explaining why yen crosses drifted higher later in the session. It was already expected.

Attention now shifts to Japanese wages data due later Friday. Average cash earnings are expected to rise 3.2% from a year earlier, up from 2.7% in March, helping to keep real wage growth comfortably in positive territory. At a minimum, that's required to keep the BOJ on track to keep hiking given household spending remains weak despite stronger wage growth, risking the virtuous cycle between stronger demand and sustained inflation pressures that allowed the bank to begin normalising policy in the first place.

All Eyes on Payrolls

Outside Japanese data, the main macro event Friday is undeniably the US non-farm payrolls report for May. There is no debate.

If we get a stonking result, accompanied by an undershoot in the unemployment rate, the yen could get taken out to the woodshed, even with the threat of intervention lingering above 160 in USD/JPY.

While initial jobless claims rose more than expected last week, I'm reluctant to read too much into the increase given the tendency for volatility around major US public holidays, such as Memorial Day. One soft claims report is also difficult to square with this week's stronger ADP employment print and a broader run of upside surprises in prior payrolls reports.

More broadly, US economic data is beating expectations at a rate not seen since late 2023, according to Citi's Economic Surprise Index. As discussed in separate analysis yesterday, that suggests the risks around payrolls may be skewed to the upside, not the downside. While that could pressure the Aussie against the USD, the antipodean FX names have been much more closely aligned with risk appetite than rate differentials lately, hinting an upside surprise in payrolls may deliver upside in AUD/JPY.