(Giles Coghlan LLB, Lth, MA – HYCM)
The Bank of Japan intervened to strengthen the Yen, the Federal Reserve statement affirmed bullish STIR markets pricing for the USD, the Swiss National Bank disappointed markets with a 75bps hike (vs 100bps expected), and the Bank of England delivered a more conservative 50bps hike. This was all in the space of 24 hours. Moreover, Russia escalated its mobilisation of troops for its offensive into Ukraine with the calling up of 300,000 reservists coupled with a thinly veiled threat of a nuclear response to the West. It is hard to imagine a more eventful week and both risks, as well as opportunities, abound in markets at these times.
Other key events from the past week
- USD: Fed rate decision, Sep 21: The Fed hiked by 75 bps to 3.00-3.25% and Jerome Powell delivered a significant hawkish message expanding the terminal rate to 4.6% for 2023, up from 3.8% prior. However, is the USD at its peak now?
- GBP: BoE rate decision, Sep 22: The Bank of England raised the base interest rate by 50bps this week, but that was lower than the 75bps some economists were expecting. Will the GBP keep tracking lower now or has all the bad news been priced in?
- JPY: BoJ rate decision, Sep 22: The BoJ met and kept both rates unchanged and yield curve control. However, early on Thursday in the European session, the BoJ intervened in currency markets sending JPY pairs sharply lower.
Key events for the coming week
- China: PMI relief? Sep 30: China’s stock market has been pressured due to China’s slowing economic outlook weighed down by the property crisis and China’s Covid Zero policy. Will positive PMIs be able to ease these concerns?
- USD: Inflation in focus! Sep 30: After the very high inflation print on September 13 markets will be very sensitive to any signs that inflation is falling. Expect a big miss here to relieve some of the pressure on the Fed to hike rates so aggressively and potentially weaken the USD.
Yen settles down after wild ride
(Kenny Fisher – MarketPulse)
It was certainly a day to remember for the Japanese yen on Thursday. USD/JPY traded in a stunning 550-point range, as the yen fell sharply before reversing directions and closing the day up over 1 per cent. Things have calmed down today, as USD/JPY is trading quietly at 142.37.
Japan’s currency intervention sends yen flying
The yen has been on a dreadful slide, losing about 20% of its value against the US dollar this year. The markets had grown accustomed to verbal rhetoric from the Bank of Japan and the Ministry of Finance (MoF), which expressed their concerns about the yen’s depreciation and warned that all options were on the table, with no action to back up the comments. On Thursday, the yen breached the psychological level of 145, and this proved to be a line in the sand for Japanese officials.
The day started with a rather muted BoJ meeting, with policymakers maintaining its ultra-loose policy and declaring that the Bank would increase stimulus if needed. This pushed the yen to a low of 145.90, which triggered a stunning response from the MoF, as it intervened to prop up the yen for the first time since 1998.
The yen soared as much as 2.5% after the intervention, but the big question is whether such unilateral action will last, or will it only delay the yen’s downward trend. US Treasury yields are rising fast, and unless the BoJ tweaks policy, the US/Japan rate differential will continue to widen, which will send the battered yen even lower.
Another factor weighing on the yen is the contradictory policy between the BoJ and MoF, which was apparent yesterday and caused the yen’s wild ride. The MoF has intervened to prop up the yen, while at the same time the BoJ is keeping JGB rates at low levels, and Governor Kuroda has said more than once that a weak yen is not necessarily a bad thing. These conflicting signals invite speculation and yesterday’s currency intervention, although a bold move, may do little more than slow down the yen’s descent.
- USD/JPY tested resistance at 144.71 but then retreated. Above, there is resistance at 146.49.
- USD/JPY is testing support 143.19. The next support line 141.88.