FX Update: Market challenges BoJ. ECB set to hike 100 bps? FX Update: Market challenges BoJ. ECB set to hike 100 bps? FX Update: Market challenges BoJ. ECB set to hike 100 bps?

FX Update: Market challenges BoJ. ECB set to hike 100 bps?

Forex
John Hardy

Head of FX Strategy

Summary:  The JPY is tumbling again even as yields trade relatively sideways and as the grinding disparity widens between the Bank of Japan’s yield caps and rising front-end policy rates and rate expectations elsewhere, most notably in Europe, where the ECB nonetheless needs to hike 100 basis points if it really wants to impress markets this Thursday. In the background, the US dollar is a bit sideways, while sterling has launched a relief rally on the arrival of Liz Truss as new UK Prime Minister.


FX Trading focus: Market challenges BoJ again. ECB has to hike 100 to impress.

A new runaway move lower in the JPY is the focus today even as yields at the longer end of the yield curve remain relatively anchored after a modest correction late last week. The focus may simply be on the widening divergence between policy rates ratcheting higher everywhere else while the Bank of Japan maintains that it will not budge any time soon. Some thoughts on EURJPY below, while USDJPY has cleared 141.00 and has not traded this high since a brief episode of a few months in 1998 during the Asian financial crisis. The Bank of Japan YCC policy is under duress and the pressure will ratchet that much higher if the US 10-year yield. Already with this latest move we should expect some stiffening verbal intervention that inevitably won’t last long.

EURUSD teased back towards parity for whatever reason this morning, perhaps in hopes that the European energy cap plan will prove a boost, perhaps on hopes that the ECB is set to surprise to the upside at Thursday’s ECB meeting. It’s a long shot according to the odds, which strongly favour a 75 basis point move over a 50 basis point move, but if the ECB wants to play some real catchup and help stabilize the euro currency, it should hike rates 100 basis points and indicate a willingness to do so again. It is not helpful for Europe that the Kremlin has now explicitly made it clear that the failure to restart deliveries of gas through the Nord Stream I pipeline are a weaponization of gas flows aimed at EU sanctions. Everyone is becoming a natural gas expert now, with the gist that the EU can survive the winter with no Russian gas as long as demand drops around 20% and there are no further disruptions of other non-Russian supplies. The situation would have been far better had not French nuclear woes and a massive drought impacted hydroelectric production not created the perfect storm this winter for power prices.

Chart: EURJPY
EURJPY is an interesting to watch in addition to USDJPY as the pair has traded back to new highs despite Europe’s dire energy situation (to a significant degree, Japan is also beset with high energy costs, given its reliance on important LNG and oil). But the ECB policy rate anticipated through the December ECB meeting is some 70 basis points higher than it was in mid-August, while the Bank of Japan carries on its yield-curve control policy, helping to pump this cross back higher. Next key test is over the ECB meeting on Thursday and then whether US data this week and through Monday’s August CPI data point excites a further rise in US treasury yields.

Source: Saxo Group

Freshly minted UK Prime Minister Truss used her first day in office to launch a £130 billion package to cap energy bills at their current level in order to avoid the cost-of-living crisis for many had bills risen as scheduled to nearly double the current levels next month. The cost estimate is spread over 18 months and represents some 5% of UK GDP now, (likely considerably less next year, given the runaway nominal growth in the UK economy at present). Sterling has seen a solid relief rally on hopes for Trussonomics, which will include tax cuts and a possible threat to Bank of England independence. Longer term efforts to increase investment in new energy sources could pay long term dividends, but the UK and its currency can ill-afford aggravating already yawning deficits in the near term, and further Bank of England rate hikes will aggravate risks to growth/real estate while piling onto the stark mathematics of future deficits and sovereign cost-of-debt-service calculations. Still, it is a riveting effort to watch as Truss and her strong Conservative majority can show more dynamism and force in policy making than we are going to get in the near to medium term from the US or Europe.

Australia’s RBA hiked 50 basis points as almost universally expected and claimed in its statement that it is on “no preset course”. The front-end of the Australian yield curve hardly budged on the news after some intraday volatility as the market expects higher odds that the RBA downshifts at tone of the coming two meetings to a 25-bp hike. RBA Governor Lowe is set to speak on Thursday, an event that could provide a stronger bias than the neutrality we saw last night.

Note fairly strong new highs in USDCNH today above the cycle high and within reach of the psychological 7.00 level now (7.20 area nearly touched in 2019 and 2020 the cycle focus and the CNY hasn’t shown much independence of movement in the crosses.)

Table: FX Board of G10 and CNH trend evolution and strength.
Sterling trying to make a comeback in momentum terms, but is only about halfway to notable resistance in the key EURGBP and GBPUSD pairs. Elsewhere, not the recent CNH downside momentum and Aussie following suit to a degree, while the JPY takes the crown for most negatively trending currency in our universe.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
The AUDNZD upside attempt is faltering – is it set to flip negative? Elsewhere, note GBPJPY and SEKJPY trying to set the direction back higher, a sign of the broadening downside pressure on the JPY.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1345 – US Aug. S&P Global Services PMI
  • 1400 – US Aug. ISM Services
  • 2105 – New Zealand RBNZ’s Silk to speak
  • 0130 – Australia Q2 GDP
Disclaimer

The Saxo 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 is not intended to and does not change or expand on this. 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 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 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 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 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 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-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.