JPY approaching new lows as extra budget approved

JPY: Close to lows with limited noise from Tokyo

The USD/JPY rate remains within touching distance of the recent highs just prior to the correction lower in response to weaker US data and lower yields. After the across the board weakness of the US dollar last week due to the weak jobs report, this week has seen the complete opposite with all G10 currencies weaker. The high in USD/JPY on 1^st November of 151.72 looks set to be breached with limited push-back in rhetoric from Tokyo. The positive momentum for the dollar was helped by the jump in yields – the 10-year intra-day low-to-high move was nearly 20bps with the disappointing 30-year bond auction a key catalyst. The 30-year auction was alarming with the yield drawn from the auction at 4.769%, 5bps higher than where it was trading prior. According to Bloomberg data, that has only happened once before over the last decade. The impact of this poor auction could linger and certainly over the short-term the risks for yields will remain skewed to the upside.

Fed Chair Powell also spoke yesterday not long after the auction results and stated that the FOMC “was not confident” that they had achieved a “sufficiently restrictive stance”. That added to the negativity in the bond market and was the bigger impact on fuelling US dollar demand given the dollar had corrected back lower after the poor bond auction. That price action makes sense. We are not convinced that higher US yields on the back of poor US Treasury bond auctions will be US dollar supportive and the supply problem for US Treasury bonds will become a bigger negative focus once the US economy starts to weaker.  

The fiscal backdrop is no better in Japan of course but one notable difference is that the BoJ is not selling JGBs like the Fed is selling UST bonds. We can’t envisage a scenario of QT in Japan and the supply of JGBs was added to today after the cabinet approved the latest fiscal stimulus package. The confirmation of the JPY 13.2trn package will incorporate JPY 8.9trn of new JGB issuance with surplus cash and extra revenues making up the remaining amount. The package has been met poorly by the general public with concerns over Japan’s 255% debt-to-GDP level. This is an indication that as usual much of this stimulus will not be spent. The cabinet’s approval rating dropped by 10.5ppts in a JNN poll conducted last weekend.

The US yield move and the likely limited impact of this stimulus package on growth (CPI will be held lower for longer though and the government estimate a 1.2ppt lift to GDP over three years) will likely keep USD/JPY in a slow grind higher, especially given the silence from Tokyo on USD/JPY levels at the moment.

DXY GAIN YEAR-TO-DATE (2.3%) IS ALL ABOUT USD/JPY

Source: Macrobond

GBP: Better GDP data but no game-changer

We have just had the release of Q3 GDP data from the UK and the data indicates stronger than expected economic conditions but the scale of outperformance is unlikely to prompt much change in market pricing. Real GDP was flat in Q3 in contrast to the -0.1% Q/Q market consensus. The BoE had estimated flat growth and also has estimated flat growth out through to the end of next year. The composition of growth was not particularly positive with all the main areas of the economy showing weakness bar one. Consumer spending, business investment and government spending all fell with only net trade adding to growth. Given the global demand backdrop, that’s not an area of economy the UK can be dependent on. Strikes in education and health and unusual weather served to hit growth at a time when the monetary tightening transmission continues to intensify.

The market currently has about 40bps of monetary easing priced in the UK by September next year, less than Europe and the US. Today’s data is unlikely to alter that pricing much with the market likely to consolidate into next week when we have the key CPI data. The jump in UST bond yields after the poor 30-year auction will likely set the scene for today’s trading. That jump in yields has led to higher risk aversion with equities in Asia mostly lower. Gilt yields will likely move higher today in response to the UST bond yield move last night but comments from BoE’s Huw Pill on rate cuts by mid-2024 being a plausible scenario have in general kept yields pressured to the downside in the UK and today’s data is unlikely to change that.

UK GDP GROWTH STILL LAGGING BEHIND 

Source: Macrobond & Bloomberg

KEY RELEASES AND EVENTS

Country	GMT	Indicator/Event	Period	Consensus	Previous	Mkt Moving
CH	08:00	M2 Money Stock (YoY)	--	10.3%	10.3%	!
CH	08:00	New Loans	--	665.0B	2,310.0B	!!
CH	08:00	Outstanding Loan Growth (YoY)	--	10.9%	10.9%	!
CH	08:00	Chinese Total Social Financing	--	1,900.0B	4,120.0B	!
IT	09:00	Italian Industrial Production (YoY)	Sep	--	-4.2%	!
IT	09:00	Italian Industrial Production (MoM)	Sep	-0.2%	0.2%	!
SZ	10:00	SNB Vice Chair Schlegel Speaks	--	--	--	!
US	12:30	Fed Logan Speaks	--	--	--	!!
EC	12:30	ECB President Lagarde Speaks	--	--	--	!!!
UK	13:00	NIESR Monthly GDP Tracker	--	--	-0.1%	!!
US	14:00	FOMC Member Bostic Speaks	--	--	--	!!!
US	15:00	Michigan 1Yr Inflation Expectations	Nov	--	4.2%	!!
US	15:00	Michigan 5Yr Inflation Expectations	Nov	--	3.0%	!!
US	15:00	Michigan Consumer Expectations	Nov	59.5	59.3	!!
US	15:00	Michigan Consumer Sentiment	Nov	63.7	63.8	!!
US	15:00	Michigan Current Conditions	Nov	69.5	70.6	!
CA	15:30	BoC Senior Loan Officer Survey	Q3	--	7.6	!

Source: Bloomberg