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.
Upcoming Economic Calendar Highlights
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)
