JPY: Weakness unhinged by verbal intervention, is real intervention a threat?
Higher Treasury yields refreshed the pain for the Japanese yen as US and Japan yields continued to widen. USDJPY printed fresh 10-month highs of 147.82 in the Asian morning today, building on the overnight gains. Fresh highs ironically came after a round of verbal intervention with currency chief Kanda-san asserting that speculative moves could prompt action. Yen weakness was however more a dollar strength story, rather than pronounced yen weakness.
Yen’s verbal intervention begs the question whether a real intervention is likely? As we have seen in the past, real intervention barely reverses the course of the yen sustainably. The last BOJ intervention resulted in yen gains for two days, before the weakness came back. As such, intervention may only be impactful if monetary policy is geared in the same direction, i.e. the direction of yen strength.
The next question, then, is whether the BOJ could consider another tweak to its monetary policy at the September 22 meeting? With Japan’s 10-year yield still below 0.7%, or 30bps below the new 1% ceiling, there will be little room for the yields to rise if BOJ moved to further raise the ceiling. So any effective move will have to be towards ending the negative interest rate policy, but that may only come if USDJPY moves beyond 150, which is not completely off the mark if oil prices extend gains further. Comments from BOJ member Takata hinted at scope of a policy tweak. He flagged progress in the goal to achieving sustainable 2% inflation. He stayed away from direct FX comments but was heard commenting on (the end of) negative rates, spooking more speculations of a September tweak.
Market Takeaway: Fundamentals still point towards more JPY weakness but intervention threats or scope of reversal in US yields and dollar could limit the pace.
CNH: Waiting for more property sector measures
While Japanese authorities stopped at verbal intervention, things got real on the Chinese side. USDCNH moved above 7.30 overnight and the move extended to a high of 7.33 in the Asian morning despite a strong +1000pips fixing signal from the PBoC reaffirming the stance to defend any rapid decline in the yuan. That prompted a stealth intervention by Chinese authorities and state-owned banks were in the market selling USDCNY to support the yuan. Moves in onshore yuan filtered through to the offshore pair as well and USDCNH moved lower to 7.3140.
Bigger focus is on the broadening out of China’s property sector reforms after earlier reforms seemingly supported only the tier-1 and stronger tier-2 cities. Property developer stocks were however lifted today as Chinese state media outlet the Securities Times had an article calling for the removal of “unnecessary” home buying curbs in non-first-tier cities. Such a move can further help ease the funding pressure on developers, so may provide a temporary relief to sentiment and Chinese assets.
Market Takeaway: Move in USDCNH towards August highs of 7.35 may be slowed by further policy support announcements.
Antipodeans: CAD in focus with higher oil prices and BOC meeting on the radar
AUDUSD was hurt the most in the ascent of the US dollar, with a miss in China PMI, broader risk-off and RBA standing pat, all at once. Australia’s Q2 GDP growth of 2.1% YoY came in above expectations (1.8%) but slowed from Q1 (2.4%). While headline growth appeared strong at 0.4% QoQ, the per-capita growth fell 0.3% QoQ suggesting a technical per-capita recession which is currently being masked by population growth due to immigration. Household consumption was also up a mere 0.1% QoQ, so overall GDP growth was only supported by exports and government spending. This may mean that the RBA’s pause can turn into an end of the tightening cycle unless inflation comes back roaring higher. AUDUSD has found support at 0.6360 for now, but a decisive break below could bring November lows of 0.6270 in sight.
Meanwhile, CAD was the strongest currency on the G10 board on Tuesday with support coming from higher oil prices after Saudi Arabia and Russia extended production/export curbs through to the end of the year which saw Brent breaking above the key $90/barrel mark. The setup going into the BOC meeting today is proving to be complex with oil price surge again raising inflation fears globally which may caution the central bank against a clear dovish turn that is demanded by the weak growth metrics.
Market Takeaway: USDCAD key resistance at 1.37 could be in sight if BOC goes for a dovish hold. CAD crosses such as AUDCAD and CADJPY may have room for correction.