Head of FX Strategy
Summary: A huge bout of volatility on Friday as apparent intervention took USDJPY down several figures after the aggravated rise above 150.00. US treasury yields likewise reversed course Friday and the US dollar was taken down a few notches as this brightened sentiment. But as with the prior round of JPY intervention, the half-life seems very short, and the US dollar is already quickly rebounding this morning again after a small additional drop overnight.
FX Trading focus: The half-life of JPY intervention is short
A bout of apparent intervention materialized Friday after a further acceleration to the upside in USDJPY to almost 152.00, as that move coincided with the latest aggravated rise in US treasury yields and after the initial break of 150.00 failed to spark intervention as many though it would. The USDJPY move took the USD down several notches elsewhere as well, as treasury yields also retreated and risk sentiment improved suddenly. Overnight, another apparent round of intervention took the price action back below 146.00 briefly before the exchange rate rebounded above 149.00, or about where it was trading last Wednesday. As with the prior round of intervention when USDJPY was bid up above 145.00, it seems the half-life of the impact from intervention is very short indeed.
Elsewhere, sterling has tried to muster a rally on what looks to be a quick path for Rishi Sunak to become the next UK prime minister already this afternoon. From here, the Bank of England and the (presumably) Sunak-led government will follow the fiscal austerity script to avoid the kind of market melt-down we saw in the wake of the Kwarteng “mini-budget”, but that doesn’t mean we should expect a substantial sterling rally. Tight fiscal policy is normally a currency negative and will aggravate the worsening of the UK’s economic outlook, meaning that the Bank of England will be that much more reluctant to take yields as high as the market is currently pricing they will (which will in turn likely weigh on the currency in the medium term.) The market has priced the BoE to reach a 5.00% policy rate by the May meeting next year. Both of the flash October PMI’s for the UK surprised on the negative side, with Manufacturing at 45.8 vs. 48.9 on Sep, and Services at 47.5 vs. 50.0 in Sep.
Chart: USDJPY
USDJPY some apparent further intervention that briefly took USDJPY below 146.00 overnight, we have already rebounded to levels that traded as recently as mid-last week. From here, we might expect to see some bottled up price action if we re-approach the 152.00 area as the market knows that intervention will arrive again at some point – although a “learned behaviour” from prior experience might be that intervention will only arrive in force again at some higher level – perhaps 160.00? Just as long as it takes a bit of time to get there… the BoJ/MoF have argued that JPY levels are less material than whether the currency is falling at an “excessive” pace. In the meantime, only a material retreat in US treasury yields below, for example, that key 4.00% level in the 10-year US yield benchmark can bring some offsetting support for the JPY. Unlike the last time the Bank of Japan intervened in markets, it has been noted, they are playing coy on whether intervention has taken place and are willing to do it outside of Japanese trading hours, clearly taking aim at foreign speculation in JPY weakness. The Bank of Japan meets this Friday.
Fed downshift at November meeting? The WSJ’s point-man on the Fed, widely considered to have solid access to Fed sources, but a minimum an excellent collator of recent Fed communication, argued in a piece released this Saturday that the Fed may begin to downshift from the 75-basis point hike pace, perhaps already after the November 2 meeting next Wednesday. Timiraos notes that some Fed officials like dove Vice Chair Brainard are more cautious, suggesting a 50 basis point hike in December and then eventually a pause in the tightening regime at some point early next year to offer time to assess the impact of the rapid pace of rate hikes, which took the Fed Funds rate from 0-0.25% as late as March of this year to the projected 3.75-4.00% priced in for the November 2 meeting. But he also notes the variety of opinions among Fed officials, some of whom are in favour of carrying on with the current pace of tightening and not wanting to signal any change in resolve as long as inflation persists anywhere near current levels. As he notes, the difficulty will be in signaling a slowdown in tightening even as inflation remains well above acceptable levels. Certainly, the data won’t move quickly enough by the December meeting for the Fed to be able to declare “mission accomplished”. I still suspect that the Fed “turn” will occur because ongoing QT creates some level of unacceptable dysfunction in the US treasury market that requires liquidity provision. Last week, it felt like we were getting close…
Finally, the USDCNH move also deserves as much as attention as we can spare at the moment after the market gave the thumbs down to the leadership shuffles at the recent party congress, as all factions not loyal to Xi Jinping were removed from the key top political posts at the weekend. The Hang Seng index was down over 6% overnight, worsening its recent slide, and the renminbi lost considerable ground, posting a rare 1% down day today against the greenback, which took USDCNH to a new record high since the creation of the off-shore tradable yuan and since early 2008 for USDCNY.
Table: FX Board of G10 and CNH trend evolution and strength.
Watching for sterling performance to fade broadly from here, if without the crazy drama we saw in late September. Elsewhere, note the broad CNH weakness – how hard will China move to defend the impression that the currency is devaluing here? Wouldn’t be surprised to see AUD remaining weak on CNH fallout.
Table: FX Board Trend Scoreboard for individual pairs.
Quite a reversal we have seen of the Friday rally attempt in AUDUSD – offering fresh confirmation fo the downtrend. Elsewhere, the jury is certainly out on the EURUSD attempt to establish an uptrend -it’s at the tip of a consolidation triangle – watching for direction there – and same goes for GBPUSD.
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As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
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