JPY: Heightened intervention risk helping the yen to outperform

The yen has continued to trade at stronger levels overnight after strengthening at the start of this week on the back of fresh warnings from Japanese policymakers over the threat of further intervention. USD/JPY fell to an intra-day low yesterday of 156.51 after Reuters reported comments from Japan’s chief currency official Atsushi Mimura stated that the country’s prime minister and finance minister, along with the US, have recently sent a “very clear” message about yen depreciation. He added that markets should take that message at face value, saying he would be watching closely to see whether they do. He remains neither satisfied nor reassured by the yen’s recent moves. The report by has been followed by comments overnight from Finance Minister Satsuki Katayama who told reporters that “as Takaichi said during the recent Japan-US commit in New York, and I believe, generally speaking, the undervaluation of the yen is a problem”. She reiterated that “we will continue to maintain close communication between Japanese and US financial authorities and work to maintain orderly conditions in the foreign exchange market”.

Finance Minister Katayama held a phone call with US Treasury Secretary Scott Bessent on Friday in which both officials reaffirmed shared concerns over the yen’s undervaluation and agreed to further strengthen cooperation. She reportedly told Scott Bessent that Prime Minister Sanae Takaichi is not a reflationist to reassure him that the government is not seeking unchecked expansionary policies. At the same time, Finance Minister Katayama indicated that she is not overly concerned by on the ongoing rise in JGB yields. She stated that she shares the measured view of Stanley Druckenmiller and Jamie Dimon that the rise in yields in Japan is not particularly large compared to other major bond markets. There was good news for ultra-long JGBs overnight when the latest 40-year auction drew its strongest demand in six years. The bid-to-cover ratio of 3.1 was the highest since 2020 coming well above the one-year average of 2.67. Another tentative sign that higher yields are beginning to make JGBs more attractive. The JGB curve has flattened significantly in recent months as short-term yields have risen much more than longer-term yields.           

Overall, the comments from Japanese officials at the start of this week continue to send a strong signal that Japan is prepared to intervene against to support the yen. They are also encouraging speculation that Japan will also make other policy adjustments to provide more support for the yen such speeding up the pace of BoJ rate hikes under pressure from the US. The BoJ has already sped up the pace of hikes this month (every three months) and signalled that a faster pace of hikes is likely to continue heading into year end. We expect the next hike to be delivered in December while the Japanese rate market is attaching a higher-than-normal probability (~36%) to a back-to-back hike next month. The latest developments are helping to cap further upside for USD/JPY even as the US dollar strengthens broadly. It is helping to the yen to outperform other G10 currencies in the near-term.

FLATTER JGB YIELD CURVE & STRONGER JPY

Source: MUFG Research, Macrobond, Bloomberg

AUD: RBA delivers another hike but hopes policy is restrictive enough

The Australian dollar has softened overnight falling back below the 0.7000-level against the US dollar. The pair is currently testing important levels at around the 0.7000-level where the 200-day moving average is also located at close to 0.7030. It has held above the 200-day moving average since November of last year. The Australian dollar has lost upward momentum this month amidst broad-based US dollar strength, and a correction lower for commodity prices. The price of iron ore has dropped by around 5% from the high set earlier this month. Similarly, the sharp ongoing rise in global bond yields is creating a more challenging backdrop for investor risk sentiment putting a dampener on the near-term performance of high beta G10 currencies such as the Australian dollar.         

The Australian dollar’s position as one of the highest yielding G10 currencies was supported overnight by the RBA’s decision to hike rates for the fourth time this year lifting the policy rate up to 4.60%. The decision to hike rates was justified by the RBA’s judgement that inflationary pressures are likely to persist for longer than previously expected. The RBA reiterated that they will “continue to do what it considers necessary to bring inflation sustainably back to target, including increasing the cash rate target further if needed”.  The board remains “focused on ensuring that high inflation does not become embedded”. The Australian rate market is expecting one more hike by the end of this year in either November or December.  Governor Bullock did add though in the press conference that she hopes that four hikes are restrictive enough to slow inflation, but she doesn’t know. She added that the RBA considered a 25hike at today’s meeting or a pause. Those comments may put a dampener on expectations for further tightening and has weighed on the Aussie overnight.