Written by Convera’s Market Insights team
Yen languishes under intervention cloud
George Vessey – Lead FX Strategist
The Japanese yen is not far off the one-year low of ¥151.74 hit this week and the three-decade low of ¥151.94 touched last year, which triggered an intervention by Tokyo at the time. The yen dropped around 1.7% against many major peers yesterday and hit a fresh 15-year low against the euro after markets were obviously disappointed with the Bank of Japan’s (BoJ) willingness to keep its Yield Curve Control framework.
The broad yen sell-off on Tuesday erupted after the BoJ watered down its 1% yield cap on the 10-year bond. Economists saw that as an unambiguous sign there would be no cap in the future, but markets saw it as insufficient to close the wide interest rate gaps that have kept the currency under pressure. The yen suffered one of its biggest daily drops of the year, adding to its circa 13% slide against the US dollar year-to-date.
Markets have been on high alert in recent months for possible yen-buying intervention by Japanese authorities, and Japan’s top currency diplomat Masato Kanda said today that authorities were on standby to respond, which has halted the yen’s depreciation for now. Any intervention could send shockwaves through financial markets.
Dollar steady before expected Fed hold
George Vessey – Lead FX Strategist
The US dollar index clocked its third monthly rise in a row and is suspended over 7% above its 2023 low recorded in July. As well as resilient US economic data, the surge in Treasury yields has supported dollar demand. But the rise in long-dated yields to multi-year highs has done a lot of the heavy lifting in terms of tightening financial conditions too, meaning the US central bank is likely to remain on hold today and probably in December.
Although we expect no change to interest rates, Federal Reserve (Fed) policymakers will want to avoid giving the market the excuse to backtrack on the recent repricing of “higher for longer” rates. Any signal that policy has peaked could tempt traders to drive market rates lower in anticipation that the next move would be rate cuts. Therefore, officials will continue to leave the door open for additional rate hikes, especially since recent data justifies it. After the blockbuster GDP print last week, fresh data showed employment costs in the US rose more than expected in Q3, due to rising wages, continuing to point to a tight labour market. The data stunted dovish Fed expectations and caused a spike in the front-end of the yield curve, boosting the US dollar across the board.
However, data also showed the US consumer confidence index has fallen for three straight months, and with consumer spending the most important growth engine in the US economy, we still see recession risks on the horizon. In the meantime, just hours before the Fed decision, the US Treasury will release its new borrowing plan for the months ahead and as we explained yesterday, this could be a bigger market mover than the Fed.
Cheerful US data sends EUR/USD back under €1.06
Ruta Prieskienyte – FX Strategist
Tuesday’s euro performance was mixed across the G10 space, but it rose against the safe havens CHF and JPY, which reached a 15-year high, on improved risk sentiment and BoJ policy tweaking. EUR/USD tried to hold onto above the €1.06 handle given a mixed bag of eurozone data releases, but an upward surprise in US consumer sentiment data sent the pair back under, closing 0.4% lower on the day.
The Eurozone economy shrank 0.1% q/q in the three months to September 2023 marking the first contraction since 2020. The figure fared worse than the ECB expected in its latest estimate—from September—by 0.1pp. Looking ahead, surveys have continued to sour at the start of Q4, suggesting that the economy entered a technical recession in H2. Softer bank lending will likely weigh on investment, and weak global growth will keep a lid on net trade, offsetting a continued rebound in consumers’ spending. On a more positive note, the inflation rate in the Eurozone declined to 2.9% y/y in October 2023, reaching its lowest level since July 2021, and the core rate also cooled to the lowest point in over a year. In contrast, inflation in services dipped by just 0.1pp, to 4.6% y/y, pointing to a persistent stickiness in domestic non-tradable inflation sectors. Despite the positive progress back towards the ECB’s 2% target, most of the decline seen this month was due to base effects, which are about to flip going into the winter. Energy prices fell by 1.9% and 6.6% m/m in November and December last year, respectively. As this is not going to be repeated in 2023, the y/y CPI rate will snap back marginally.
Yesterday’s data releases reconfirm the end of ECB hikes and markets continue increasing bets of policy rate cuts in 2024, with 83bps of cumulative cuts eyed next year. Given that a similar amount of policy easing is expected in the United States (68bps), communication during the Fed rate decision today will dictate the directional pairwise movement.
Sterling’s autumn woes linger
George Vessey – Lead FX Strategist
The pound ended October down against the USD and EUR and is now trading over 2% and 1% below its 2023 averages versus each peer, respectively. GBP/EUR has also wilted into the lower 10% of its 3-month trading range and into the bottom half of its 3-year range, whilst GBP/USD is near the base of its 3- and 6-month ranges due to converging UK-US rate differentials and a dwindling UK economic surprise index.
Although the UK’s economic surprise index has been positive for five quarters in a row, matching a previous record set in 2017, it’s been on a downward trajectory since the summer. Indeed, another set of soft PMIs published last week, a tick-down in core inflation and signs that wage growth may be on the turn, have all contributed to the scaling back of Bank of England (BoE) rate expectations. Money markets are pricing just a 25% chance of another rate hike in this cycle and instead the next move in UK interest rates is now seen as a cut in August next year. As a result, speculative traders have continued betting against sterling. CFTC data showed traders flipped from a net GBP long (betting on GBP appreciating) to net GBP short (betting on GBP depreciating) shortly after the BoE ended a run of 14 consecutive rate hikes. The latest data reveals the net GBP short position rose for the third consecutive week in the week ended October 24.
On the macro data front, the Insolvency Service revealed that corporate insolvencies in England and Wales have soared this year to levels not seen since the financial crisis. A rise in insolvencies is worrying for the economy as it could lead to a reduction in jobs while hitting output growth – another reason for the BoE to refrain from raising interest rates any higher.
Swiss franc remains under pressure
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: October 30 – November 03
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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.
