Written by Convera’s Market Insights team
Policy divergence prompts big swings in yen
George Vessey – Lead FX Strategist
The US dollar index suffered its biggest daily decline in five on Wednesday, weighed down heavily by the ongoing strength of the Japanese yen as a result of carry trade unwinds, safe haven flows and rising prospects of a rate hike in Japan after a huge rebound in Japanese private sector activity.
The Japanese yen appreciated past 153 per dollar, its strongest level in over two months, forcing short-sellers of JPY to exit their positions. The yen currently trades over 5% stronger versus the dollar since mid-July, with the move initially triggered by what market participants attributed to government intervention. Meanwhile, risk sentiment took another hit yesterday as the tech-heavy Nasdaq 100 dropped after a string of lacklustre earnings from big European names sparked demand for havens like JPY, CHF and gold. From the US, the composite PMI rose to 55.0 in July from 54.8 in June, the highest since April 2022, indicating continual growth over the past 18 months, with the service sector outperforming manufacturing for the fourth month in a row. Despite this growth, employment slowed, business confidence fell due to rising political uncertainty.
Whether the yen’s rally is the beginning of its big reversal depends on the monetary policy decisions by the Bank of Japan and the Federal Reserve due July 31. No changes to US interest rates are expected, but we’ve seen the 2-year Treasury yield fall below 4.40% for the first time since February after New York Fed President Bill Dudley, stated economic conditions warrant a rate cut by the central bank. We still anticipate the first cut in September in line with market expectations. In Japan though, the probability of a rate hike has jumped from 45% to over 80% this week, keeping the yen in high demand.
Risk aversion punctures pound
George Vessey – Lead FX Strategist
The British pound has fallen for three days on the trot versus the US dollar, has snapped a three-day winning streak against the euro and is being crushed by the rally of the Japanese yen – with GBP/JPY down a massive 5% in just 10 trading sessions. Sterling is trading stronger versus the Australian and New Zealand dollars though, in a sign that global risk aversion is gripping markets.
It was a wipeout Wednesday on Wall Street amidst rising fears the artificial-intelligence frenzy that has powered the bull market might be overblown. The US benchmark equity index, the S&P 500, slumped 2.3%, its first pullback of 2% or more in 356 trading days. That ended the index’s longest such stretch since 2007. The tech-heavy Nasdaq Composite fared even worse, plunging 3.6% for its worst day since October 2022 and ending a stretch of more than 400 days without a decline of 3% or greater. The pain wasn’t limited to stocks though. Yields on longer-dated Treasurys climbed while yields on shorter-dated notes fell, causing the yield curve to re-steepen. The pound, a currency sensitive to risk appetite, has therefore slipped against its safe haven peers, hence GBP/USD is struggling to hold onto $1.29 now, with $1.30 drifting further out of sight in the short-term.
Even the slightly stronger UK PMIs, helping UK bond yields turn positive yesterday, couldn’t maintain support for sterling. While input cost inflation at services firms eased amid softening wage pressures, manufacturing firms faced the strongest rise in costs in one-and-a-half years as global freight challenges linked to the Red Sea crisis drove transport bills higher. This keeps the odds of a Bank of England rate hike below 50% according to market pricing. How the BoE reacts to this data next week will be crucial for the pound’s short-term direction.
Euro bounces from a 2-week slump despite PMIs disappointment
Ruta Prieskienyte – Lead FX Strategist
The euro bounced back from a near-term technical support level at $1.083 amid a tightening in the front-end DE-US bond yield spreads. The Stoxx 50 declined 1%, weighed by disappointing corporate earnings by LVMH and Deutsche Bank, while demand for bonds remained robust.
The flash HCOB Eurozone Composite PMI declined to a 5-month low in July, missing expectations. The reading signalled a marked slowdown in economic momentum in Q2, driven by a deepening manufacturing downturn and a slowdown in services. New orders fell for the second month running and business confidence dropped to a six-month low, leading firm to halt a spell of hiring which began at the start of 2024. The two largest euro area economies continued to underperform the wider region. Output in Germany decreased for the first time in four months, despite the Euros, while France posted a third consecutive monthly reduction in business activity.
This report will be delivered at a critical juncture. Short-term, a deteriorating in PMIs this week, combined with sticky core and services inflation next week, could make the path to a September ECB-cut trickier and challenge current pricing (~22bp priced). For now, the markets remain relatively inert as the attention shifts to today’s US GDP and labour market reports.
Broad-based asset selloff resumes
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: July 22-26
All times are in BST
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
