Written by George Vessey & Boris Kovacevic
FX intervention risk is bubbling
With the US dollar in command near 10-month highs against a basket of currencies, and the Japanese yen’s depreciation to the psychological level of ¥150, the growing risk of FX intervention by Japanese officials might be the catalyst to stall the dollar’s recent rally.
USD/JPY has remained tightly correlated to the 10-year yield spread in recent years, and with the higher for longer narrative gaining traction, the US 10-year Treasury yield has breached 4.5%. This is boosting the dollar and keeping the lower-yielding yen under negative pressure. We suspect the Bank of Japan will intervene to limit excessive FX volatility and JPY weakness but likely only when officials believe the yield spread is peaking, as they will want any intervention to get support from market conditions. That said, early this morning, Japanese Finance Minister Shunichi Suzuki warned against speculative moves on the yen as it approaches what many market participants believe is the line in the sand that would spur intervention.
The repercussions of any FX intervention could be vast. Last year, for example, the selling of USD for JPY resulted in the yen soaring across the board and GBP/JPY and EUR/JPY dropped about 4% in a day – one of their biggest daily declines on record.
Inflation in focus as euro struggles
EUR/USD has dipped under the $1.05 level for the first time since December last year as European macro data continues to disappoint, and surging energy prices weigh on the euro whilst the safe haven USD picks up as rumours of a US government shut down rise and US yields surge. The currency pair is on track for its longest weekly losing streak since 2014.
Investors continue to wait on the bottoming of the German economy with the Ifo business climate index falling for a fifth month. Both the headline and current conditions index surprised the consensus to the upside. However, given the large negative deviation of these indicators compared to their historic averages, it seems that the German economy continues to battle 1. weak growth from China, 2. high interest rates in Europe, and 3. domestic political headwinds. Today, inflation data is in focus, with CPI releases coming from right across Europe. While the Spanish numbers are likely to show a rise in the y/y rate, the underlying picture remains one of declining inflation. German CPI should show a sharp decline in y/y rates due to base effects in spite of some recent rise in fuel prices.
This provides another reason to expect the top to have been reached in Eurozone interest rates. Weaker inflation and macro data could force the European Central Bank’s hand to cut rates in early 2024, and markets are starting to agree. This pricing could continue weighing on the common currency with $1.04 a potential downside target in the short term.
Time for a rebound, pound?
We see a strong possibility of further sterling downside over the next few weeks and months. However, it might be time for a short-term rebound or at least some consolidation at current levels given the extreme oversold conditions of GBP/USD, which is reflected in the daily relative strength index (RSI).
The RSI is a momentum indicator used to determine the strength or weakness of a currency and whether its deemed overbought or oversold. It can also indicate a trend reversal or corrective pullback in price. The RSI of GBP/USD is below 20 for the first in 12 months. The last time it was around this level, the currency pair had fallen to a record low but rebounded 10% in seven days. We’re not saying this kind of rebound will happen again, but we do feel the pound is overdue some relief as its fallen for six days straight and for 15 days out of the last 20 – amounting to a near 5% decline. We see $1.23 as potential short-term upside target, but the 50-week moving average may now be a tough resistance level to overcome.
Elsewhere, sterling bounced modestly against European currency peers like EUR, SEK, CHF and PLN in particular yesterday, but is back on the defensive this morning.
Oil soars nearly 6% in seven days
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: September 25-29
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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.
