Sharp JPY sell-off is starting to cause more concern in Japan

JPY: Intervention risk steps up after sharp yen sell-off

The yen has rebounded modestly overnight following yesterday’s sharp sell-off. It has resulted in USD/JPY falling back closer to the 152.00-level after hitting an intra-day high yesterday of 153.19. So far this month USD/JPY has risen by just over 6% which is the strongest equivalent period of gains since back in late August/early September 2022. It was then quickly followed by intervention by Japan to support the yen in September and October 2022. In light of recent price action there is building speculation over the possibility of another of bout of intervention from Japan although it appears unlikely ahead of the US election given a Trump victory and Red Sweep could trigger another leg higher for USD/JPY. Market speculation over further intervention from Japan was encouraged overnight by comments from Finance Minister Kato who stated “we are seeing one-sided, rapid moves” in the foreign exchange markets, and emphasized that “we will closely monitor the foreign exchange market with a stronger sense of urgency, including watching for speculative trading”. The comments have helped to provide some temporary support for the yen overnight but the gains are likely to prove short-lived if US yields and the US dollar continue to adjust higher ahead of the US election in anticipation of Trump victory and Red Sweep.

Renewed yen weakness could also encourage the BoJ to speed up plans for further monetary tightening after the US election. Governor Ueda did indicate overnight that it would be problematic “if you proceed very, very gradually” and trigger expectations that interest rates will stay at low level for a long period. He added that in light of “huge uncertainties, you usually want to proceed cautiously and gradually” when normalizing policy. He is concerned though that if the BoJ takes too long then it could lead to a build-up of huge speculative positions, which could become a problem later”, and as a result they “need to strike balance between the two”. The disorderly financial market conditions triggered by the unwind of yen-funded carry trades in early summer highlighted risks from the build-up of huge speculative positions. However, he did not give any clear guidance over the likely timing of the next rate hike and/or how far rates will rise in the tightening cycle. Market participants will be scrutinizing closely the BoJ’s upcoming policy update at the end of this month to see if they provide any encouragement over the potential for another hike before the end of this year. We are sticking to our forecast for a 25bp hike in December but acknowledge it may be delayed until January. Further yen weakness would support our earlier BoJ rate hike call.          

BIGGEST GAIN FOR USD/JPY SINCE LATE AUG/EARLY SEPT 2022

Source: Bloomberg, Macrobond & MUFG GMR

EUR: ECB officials start to talk up possibility of larger 50bps cuts

The euro has continued to weaken against the US dollar since last week’s ECB policy meeting with EUR/USD falling to an intra-day low of 1.0761 yesterday. The pair is now trading back below its year to date of average 1.0875 after hitting a year to date high of 1.1214 on 25^th September. The abrupt reversal lower for EUR/USD over the past month has been driven mainly by building speculation over a Trump victory and Red Sweep following the US election, and market expectations for widening policy divergence between the ECB and Fed. A Trump victory and Red Sweep could also reinforce market expectations for a wider ECB and Fed policy divergence going forward. Trump’s trade war poses upside risks for the US inflation while it would heighten downside risks for the euro-zone economy. As result, it could curtail the Fed’s room to keep lowering rates in the coming years while the ECB keeps lowering rates to support growth.             

Recent changes in monetary policies between the ECB and Fed have already started to weigh down more on EUR/USD. While the Fed is likely to slowdown the pace of rate cuts by delivering a smaller 25bps rate cut in November encouraged by the recent stronger US data flow including NFP, CPI and retail sales reports for September, the ECB has sped up the pace of their easing cycle by delivering the first back-to-back 25bps rate cut this month. The updated guidance left the door open to another rate cut at the final policy meeting of this year in December. Comments from ECB officials have even started to talk about the possibility of delivering larger 50bps rate cuts if needed for the first time. Governing Council member Holzmann stated yesterday that “I’d say a quarter-point step is probable in December. A bigger half-point cut is unlikely though not impossible”. He expects some colleagues to push for a bigger cut in December. Governing Council member Centeno is one colleague who has already come out in support of larger rate cuts this week. The developments have encouraged the euro-zone rate market to price in a higher probability of a larger 50bps rate cut at one of the upcoming policy meetings. There are currently around 61bps of cuts priced by January of next year. The release today of the latest euro-zone PMI surveys for October will be watched closely to see if the euro-zone economy continues to lose upward momentum in the final quarter of this year. The balance of risks remains titled to the downside for EUR/USD which could drop to fresh year to date lows if Trump wins the election and there is a Red Sweep.             

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
FR	08:15	French Manufacturing PMI	Oct	44.9	44.6	!!
FR	08:15	French Services PMI	Oct	49.8	49.6	!!
GE	08:30	German Manufacturing PMI	Oct	40.7	40.6	!!
GE	08:30	German Services PMI	Oct	50.6	50.6	!!
EC	09:00	Manufacturing PMI	Oct	45.1	45.0	!!
EC	09:00	Services PMI	Oct	51.5	51.4	!!
UK	09:30	Labour Productivity	--	--	0.1%	!!
UK	09:30	Manufacturing PMI	Oct	51.5	51.5	!!!
UK	09:30	Services PMI	Oct	52.3	52.4	!!!
US	13:30	Building Permits	Sep	1.428M	1.470M	!!
US	13:30	Initial Jobless Claims	--	243K	241K	!!!
UK	14:00	BoE MPC Member Mann	--	--	--	!!
US	14:45	Manufacturing PMI	Oct	47.5	47.3	!!!
US	14:45	Services PMI	Oct	55.0	55.2	!!!
US	15:00	New Home Sales	Sep	719K	716K	!!!
UK	16:20	BoE Gov Bailey Speaks	--	--	--	!!!
EC	18:00	ECB's Lane Speaks	--	--	--	!!

Source: Bloomberg