Monetary policy differentials and carry trade unwinding have fuelled nervousness in the USD/JPY market and, with possibly the most important U.S. data release of the year due next week, a marked increase in volatility is likely.

A degree of calm descended over USD/JPY this week but, if the options market is correct, next week could be different.
One-week yen volatility is trading at levels above 13.5%.

Next Friday's U.S. employment report could determine whether the Federal Reserve cuts rates by a widely expected 25-basis points or kick-starts its easing cycle with a half-point cut.

With U.S. jobless claims hovering close to the low point, analysts are leaning more towards a firm return for the payroll number.
The ISM-PMI employment sub-components will offer some insight ahead of the employment report release.

However a weak payroll number should not be ruled out and, despite its implications for U.S. interest rates, a poor return might have only a limited impact on the dollar.

The interest rate differential between the U.S. and Japan, supporting the dollar, is not expected to drop below 2.5% in the next two years, and the BOJ is not expected to stop buying debt.

Once the payroll dust has settled, USD/JPY is likely to move higher and establish a foot hold above the 10-day moving average, currently at 145.10.

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