Strong USD gains – month-end flow or something more?

USD: Strong rebound with USD/JPY leading the way

As was clear since yesterday morning, the BoJ policy meeting gave the green light for renewed yen selling given the change announced to the YCC framework was conservative and well short of a complete scrapping of the policy. The commitment to continue “large-scale” JGB buying was enough to signal to the markets that there was scope for the yen to weaken. The scale of increase in USD/JPY was still a surprise and the caution of the BoJ helped shape a view that the authorities in Japan are willing to accept further yen depreciation. The MoF also confirmed yesterday that they did not intervene in the FX market in October. USD/JPY has corrected marginally lower and renewed buying may be curtailed by the sterner rhetoric used today by Vice Finance Minister for International Affairs who stated that the MoF was “on standby” after “sudden” and one-sided” moves. Intervention is a much higher risk now.

The FX moves yesterday certainly did have the feel of month-end specific flows. The bond markets were relatively calm with moderate moves despite the BoJ announcement with the US, German and UK 10yr yields all down 2-5bps. So the FX moves were far larger and in the context of it being month-end we should perhaps not read too much into the scale of US dollar strength.

That said, there were developments yesterday that certainly were US dollar supportive. In particular, we would note the inflation developments in the euro-zone. The ECB’s ongoing concerns over inflation remaining “too high for too long” as cited in last week’s statement could soon start to look questionable. The advance CPI YoY rate yesterday fell sharply from 4.3% to 2.9%, the lowest level since July 2021. The US equivalent stands at 3.7%. The scale of energy shock for the euro-zone compared to the US makes this current inflation comparison incredible. The natural gas price average in 2022 compared to 2019 was a nine-fold increase in Europe and a between two/three-fold increase in the US. Headline CPI in the Netherlands fell to -1.0% in October and in Belgium it’s even lower at -1.7%.

The resilience of inflation in the US is according to the Fed more down to demand-related aspects given growth remains robust. Strong labour demand has helped keep wage inflation higher. The Employment Cost Index for Q3 was released yesterday and was marginally stronger than expected at 1.1% Q/Q. As we have stated before, the scope for further US dollar strength remains in place until we start to see hard evidence of a slowdown or faster declines in inflation. The flow of economic data yesterday certainly didn’t provide that.

10YR JGB YIELD HEADING FOR NEW BOJ 1.00% REFERENCE RATE

Source: Bloomberg, Macrobond & MUFG GMR

USD: FOMC in focus with tough talk on inflation likely to persist

There is precisely zero probability priced for a rate hike this evening and hence the FOMC will certainly keep the key fed funds rate unchanged. If that’s correct, tonight will be significant in this meeting confirming the first time the FOMC has “skipped” two consecutive meetings since the tightening cycle began. When does “skip” turn to pause/end? Well in answering that a double-skip is an important step to pause of course although it is unlikely that Fed Cahir Powell will want to relay a message this evening that strengthens the prospect of a pause or end to the tightening cycle.

There are two aspects to tonight’s meeting that will be key for the markets – the statement and the press conference. The statement is unlikely to change much – the key sentence beginning – “In determining the extent of additional policy firming that may be required……” is likely to remain while Fed Chair Powell in the press conference is likely to emphasise the strength of the economy, still too high inflation and hence the need for the policy rate to remain at the current restrictive level for a considerable period – the ‘higher for longer’ mantra will surely be stressed once again. But there will be nothing new in that and market participants fully expect that message this evening. For market reactions it’s about new elements to the message that could prove market moving.  Does Powell stress possible upside inflation risks from the outbreak of conflict in the Middle East between Israel and Hamas? Does Powell focus more on the ongoing labour market strength that has seen wage inflation remain elevated? And does Powell focus more on financial market conditions and emphasise the important tightening of financial conditions through the continued rise in longer-term UST bond yields. Our sense from ECB President Lagarde last week was that the speed of transmission has been faster than anticipated – will that sense be evident in Powell’s comments this evening?

We would certainly expect a clearer hawkish tone from Powell than what we got from Lagarde last week. The fundamental backdrop in the US is much stronger (although we expect it to weaken soon enough) and that will likely incentivise Powell to err more on the hawkish side. Powell needs more hard evidence of slowdown before discounting the chance of more rate hikes. With a December FOMC hike priced at just a 25% probability there is scope for yields to move higher this evening. With US dollar momentum more positive again after yesterday’s rebound, we could see this extend further from here.

2024 FED POLICY EXPECTATIONS WILL BE KEY FOR USD TONIGHT

Source: Macrobond & Bloomberg

KEY RELEASES AND EVENTS

Country	GMT	Indicator/Event	Period	Consensus	Previous	Mkt Moving
NO	09:00	Manufacturing PMI	Oct	--	52.5	!
UK	09:30	Manufacturing PMI	Oct	45.2	44.3	!!!
US	11:00	MBA Mortgage Applications (WoW)	--	--	-1.0%	!
US	12:15	ADP Nonfarm Employment Change	Oct	150K	89K	!!!
SZ	12:40	SNB Chairman Thomas Jordan speaks	--	--	--	!!
CA	13:30	Manufacturing PMI	Oct	--	47.5	!
US	13:45	Manufacturing PMI	Oct	50.0	49.8	!!
US	14:00	Construction Spending (MoM)	Sep	0.4%	0.5%	!
US	14:00	ISM Manufacturing PMI	Oct	49.0	49.0	!!!
US	14:00	ISM Manufacturing Prices	Oct	45.0	43.8	!!!
US	14:00	JOLTs Job Openings	Sep	9.250M	9.610M	!!!
US	18:00	FOMC Statement	--	--	--	!!!!!
US	18:00	Fed Interest Rate Decision	--	5.50%	5.50%	!!!!
US	18:30	FOMC Press Conference	--	--	--	!!!!!
CA	20:15	BoC Senior Deputy Governor Rogers Speaks	--	--	--	!!
CA	20:15	BoC Gov Macklem Speaks	--	--	--	!!

 

Source: Bloomberg