USD consolidating at higher levels after a fourth week of gains

JPY: Political risks contributing to renewed yen weakness

The major foreign exchange rates have remained relatively stable during the Asian trading session as the US dollar consolidates at higher levels after a fourth consecutive week of gains. After hitting a high this week at 153.19, USD/JPY has fallen back towards support from the 200-day moving average at around 151.40 in recent days. Verbal intervention from Japanese policymakers has helped to temporarily provide support for the yen. Japan’s top currency official Atsushi Mimura told reporters overnight that “recent moves in foreign exchange rates were discussed at a bilateral meeting between Finance Minister Kato and Us Treasury Secretary Yellen”. He added that “the two confirmed they would continue to closely communicate to exchange views”. He repeated comments from Finance Minister Kato that “our view is that that there are clearly one-sided and rapid moves, and we are closely watching currency moves including speculative trading with a stronger sense of urgency”. The comments send a clear warning signal to market participants that Japan is prepared to intervene again to support the yen if it continues to weaken like it has so far this month. However, we still believe intervention is unlikely until after the US election has taken pace. An event that will be pivotal for the performance of USD/JPY and the US dollar more broadly. While a Trump victory and Red Sweep could see USD/JPY moving back closer to year to date highs, a divided Congress with Trump or Harris as President could see USD/JPY giving back some its recent strong gains by limiting room for fiscal policy easing and helping to ease upward pressure on US yields.

Before the US election, Japan will hold its own election this weekend on Sunday. New Prime Minister Ishiba called a snap election after becoming the leader of the LDP party. We expect the LDP to remain the largest party in the Lower House after the election but with a smaller majority (click here). Opinion polls early this week even indicated that there is risk that the LDP party may fall short of retaining their majority which would further heighten political uncertainty in Japan and would be a big blow to new Prime Minister Ishiba. Domestic political uncertainty may have contributed to yen selling over the past week alongside the adjustment higher in yields outside of Japan in anticipation of a Trump win and Red Sweep following the US election.     

LONG GBP POSITIONS REMAIN POPULAR

Source: Bloomberg, Macrobond & MUFG GMR

EUR/GBP: PMI surveys & UK debt rule in focus

The euro staged a modest rebound yesterday helping to lift EUR/USD back above the 1.0800-level and EUR/GBP up to the 0.8350-level. It follows the release of the latest euro-zone PMI surveys for October which provided some relief after business confidence stabilized albeit at weak levels. The euro-zone composite PMI moved marginally higher by 0.1 point to 49.7. It follows the sharp fall in September when it declined by 1.4 point. At current levels the composite PMI survey is continuing to signal that the euro-zone economy may stagnate in the final quarter of this year. The country by country break down revealed mixed news. Business confidence continued to weaken in France while it picked up in Germany. One area of concern was the further move lower in the employment sub-components which suggest that weak economic growth is contributing to loosening labour market conditions. Overall, the surveys will keep the ECB on track to lower rates again at the final policy meeting of this year in December. Governing Council member Wunsch did though push back against recent calls for larger 50bps cuts. He stated that “I don’t see why we should have discussion on a 50 basis point in December. I think really its premature”.

Unlike the euro-zone PMI surveys, the release of the latest UK PMI surveys revealed a further deterioration in business confidence in October encouraging a modestly weaker pound. The composite PMI dropped by a further 0.9 point to 51.7 in October as it fell to the lowest level since November of last year. The surveys add to other evidence signalling that the UK economy is continuing to slow heading into year end. Markit noted that the PMI surveys were signalling that GDP growth could slow to just +0.1% in Q4 which would be a significant slowdown from growth of +0.7% in Q1 and 0.5% in Q2. It supports our call for the BoE to speed up the pace of easing by delivering back to back rate cuts in November and December. However, BoE officials have yet to provide a clear signal that a majority of MPC members are moving in favour of faster easing. MPC member Mann acknowledged yesterday that there’s good news on prices although she remains wary that the BoE may have cut rates prematurely given concerns higher inflation and wage growth could be more persistent than expected.  

In other news, the UK government confirmed yesterday that it would change the definition of debt used in their budget debt rule. While the exact details of the change will be announced in the budget, it has been reported that the change could create additional room for the government to borrow up to GBP50 billion over the parliament to fund public investment. The government is expected to emphasize though that additional borrowing will not be used for unfunded tax cuts or day to day spending which alongside additional fiscal tightening measures should help to reassure Gilt investors. Please see our FX Weekly report for more details (click here).    

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
IT	09:00	Italian Business Confidence	Oct	87.0	86.7	!
GE	09:00	German Ifo Business Climate Index	Oct	85.6	85.4	!!
EC	09:00	M3 Money Supply (YoY)	Sep	2.9%	2.9%	!
US	13:30	Durable Goods Orders (MoM)	Sep	-1.1%	0.0%	!!
CA	13:30	Retail Sales (MoM)	Aug	0.5%	0.9%	!!
US	15:00	Michigan Consumer Sentiment	Oct	68.9	70.1	!!
US	16:00	Fed Collins Speaks	--	--	--	!

Source: Bloomberg