Yen Falls to 11-Month Low, Is 150 Next?

MarketPulse by OANDA Group

Forex

Central Bank

Economic

Summary:

BoJ Ueda says 2% inflation target not yet achieved. USD/JPY pushes above 149.]

The Japanese yen is unchanged on Tuesday, trading at 148.85.

BOJ's Ueda says monetary policy to continue

The Bank of Japan maintained its policy settings on Friday, which really should not have been all that surprising, given the dovish messages that BoJ Governor Ueda and other BoJ members have been sending out for weeks. The BoJ does not appear to be in any rush to phase out its ultra-loose stimulus, given the weakness in Japan's economy. Domestic consumption remains weak and the slowdown in the global economy is hurting the critical export sector.

BoJ Governor Ueda reiterated this stance on Monday, stating that the 2% target of "stable, sustainable" inflation was not yet in sight. Ueda acknowledged that inflation had exceeded 2% for a "prolonged period", but that was not enough to indicate that the target of stable and sustainable 2% inflation had been achieved. Ueda added that the BoJ would continue to patiently maintain its monetary stance.

Inflation has remained above 2% for close to 1.5 years, but that does not seem sufficient for the BoJ. Earlier today, the BoJ Core CPI index, which is closely monitored by the central bank, remained unchanged at 3.3% in August, above the market consensus of 3.2%.

The yen has paid the price for the BoJ's insistence on maintaining an ultra-loose policy and has had only one winning week against the dollar since July. The US/Japan rate differential continues to rise as Japanese yields stay put while US Treasury yields continue to move higher. USD/JPY broke above the 149 line on Tuesday and the symbolic 150 level seems very close at hand. Japanese officials have responded with some rhetoric about their concern over the depreciating yen and the threat of intervention is rising as the yen falls lower.

USD/JPY Technical

There is resistance at 149.19 and 149.93

USD/JPY tested support at 148.79 earlier. Below, there is support at 148.05

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Economic

Central Bank

Forex

Fed signals another hike, fewer cuts in 2024

The Fed decided to keep rates steady last week, but policymakers appeared in hawkish armor, projecting a higher rate path than back in June. The new dot plot continued pointing to another quarter point hike by the end of this year, but only to two rate cuts during 2024. More specifically, officials now see rates coming down to 5.1%, 50bps higher than June's 4.6% projection.

Still, investors were not fully convinced, as their own implied path points to only a nearly 50% probability for a final hike, while it indicates that interest rates will end 2024 at 4.7%. This suggests that there is still room for market participants to adjust higher their path should data continue to point to a resilient U.S. economy, which in turn could add more fuel to the dollar's engine tanks. What CPI Means for Investors and Traders_1

What CPI Means for Investors and Traders_1

Focus turns back to the data

With that into consideration, although there is no data equivalent to Wednesday's decision on this week's agenda, investors may pay some attention to Friday's core PCE index as it appears to be a more preferred inflation metric by the Fed than the CPIs, even if it is much less of a market mover. At the same time with the core PCE index, we get the personal income and spending data, while the day before, the final GDP for Q2 and initial jobless claims for last week are scheduled to be released.

The GDP is likely to pass unnoticed as there are models already pointing to how the economy has performed during Q3. The Atlanta Fed GDPNow points to an outstanding 4.9% growth rate, while the New York Nowcast suggests that the economy grew around 2.3%. Although there is a big divergence between the two, they both point to a solid economic performance, which is unlikely to break the Fed's "higher for longer" mentality. What CPI Means for Investors and Traders_2

What CPI Means for Investors and Traders_2

Core PCE, income and spending, may all slow

For Friday's core PCE index, expectations are for a slowdown, which is supported by the cooling of the core CPI for the month. That said, even if this metric of underlying inflation slows, it would most likely remain decently above the Fed's 2% goal. What's more, considering the blend of a resilient economy and rising oil prices, the risk of a rebound in the months to come is not negligible. What CPI Means for Investors and Traders_3

What CPI Means for Investors and Traders_3

Personal spending is also expected to have slowed, confirming the slight cooling in retail sales for the month, and thereby the reduced consumer demand. Although income is forecast to have accelerated, the deceleration in the monthly average hourly earnings for August tilts the risks to the downside.

Dollar could pull back, but stay in uptrend mode

The dollar could give back a small portion of its latest gains if the data adds to the idea that inflation in the U.S. continues to cool down. However, a potential slide would be far from suggesting that the uptrend has run its course. Should growth-related data continue to suggest that the U.S. economy is faring better than other major ones, the dollar is likely to continue shining.

Besides the "higher for longer" narrative, another source of dollar strength may be risk aversion, as the latest challenges facing the Chinese economy, as well as the Eurozone and the UK, are directing extra flows into the U.S. dollar, which due to the higher U.S. interest rates seems to be investors' safe haven of choice.

Cable among the pairs to continue suffering

With the BoE unexpectedly taking the sidelines on Thursday and market participants assigning a 75% probability for no action at the November gathering, pound/dollar may be among the better choices for exploiting further dollar strength. What CPI Means for Investors and Traders_4

What CPI Means for Investors and Traders_4

Cable has been in a sliding mode since mid-July and just after last week's BoE decision, it pierced through the 1.2310 key zone, likely confirming a bearish trend reversal on the daily chart. The dip may have opened the way towards the psychological round number of 1.2000, marked by the low of March 15, the break of which could aim for the low of March 8, at around 1.1815.

On the upside, a return above 1.2310 is unlikely to make the picture brighter. It may just turn the outlook back to neutral. For this pair to enter uptrend mode again, a break above the key barrier of 1.2800 may be needed.

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Samantha Luan

Economic

Forex

USD: Focus on Treasuries again

The dollar continues its grind higher and probably the biggest market talking point is the ongoing bearish steepening of the U.S. Treasury curve. Speaking to our bond strategists, they think this is currently being driven by two factors. The first is the ongoing upward revision to where the Fed Funds rate settles after the next Fed easing cycle. Looking at the forward curve for one-month USD OIS rates, investors now see the low point in any future Fed easing cycle at around 4.00% in three years's time. Rather incredibly, at the start of this year, the market had seen the low point for Fed Funds in three years' time down at 2.70%.

The second factor weighing on Treasuries is this week's $134bn auction of two, five and seven-year notes – which takes place over the next three days. This comes ahead of a potential U.S. government shutdown this Saturday, where hard-right Republicans in the House seem to be holding out against a stop-gap spending bill. In the background remains a threat of another downgrade of U.S. sovereign rates on the back of an 'erosion of governance'.

Apart from the rise in U.S. yields, we have now started to see a rise in implied volatility in the U.S. Treasury market. This will prove a headwind to carry trade strategies and could prompt the unwinding of some of the most heavily invested positions. We would worry about the Mexican peso here, which also faces Banxico unwinding its dollar forward book in less than benign conditions. Another popular target currency in the carry trade – the Hungarian forint – may actually find some support from the local central bank today (see below).

In general, however, the continued rise in U.S. yields is making for a less benign environment and favours risk reduction. Whilst higher U.S. yields may push USD/JPY close to 150, they also increase the risk of an equity setback. That is why we think an instrument like the one-month USD/JPY downside risk reversal may be too conservatively priced. And in general, we would say commodity currencies remain vulnerable, especially those like the South African rand and Latam currencies – this latter group were hit hard during the early August sell-off in Treasuries.

DXY can probably stay bid through this if activity currencies come under pressure and technical analysts will be dusting off calls for a move to the 107.20 area.

EUR: Falling world trade does not help

Not helping the euro has been data released showing that world merchandise trade volumes fell another 0.6% month-on-month in July. As a relatively open economy, the eurozone suffers from a declining trade environment, as does the euro. Our banking analysts have also written that the ECB is considering raising the Minimum Reserve Requirement for the banks that it supervises. This would tighten conditions still further and add more growth pessimism in the euro area. The Eurostoxx 50 index is now down nearly 8% from its highs at the start of August.

EUR/USD remains soft having broken below support at 1.0600/0610. Without support from extreme under-valuation or existing heavy short positioning, EUR/USD looks as though it could sink into the 1.0480/1.0510 support area.

Elsewhere, the Swedish krona is performing surprisingly well given this high interest rate environment. Unlike the euro, the krona is backed by extreme fundamental under-valuation. Additionally, news that the troubled Swedish property developer, SBB, has secured liquidity by selling some of its property portfolio alleviates some fears of a funding crisis. And the market will no doubt be speculating that the Riksbank has started hedging its FX reserve portfolio, as promised last week. While tough external conditions hardly make it the occasion to chase EUR/SEK lower, the factors above could mean NOK/SEK drops back to the 1.01 area.

GBP: An expensive sell

With one-month implied yields at 5.20%, sterling is an expensive sell. For that reason, we think EUR/GBP may continue to trade in the 0.86-0.87 range for the time being rather than continue to march higher. GBP/USD is a different story where the ongoing strength of the dollar and the softening risk environment warn that little support can be expected before the 1.2000/2075 area.

UK-specific inputs are light at the moment. But because last week's Bank of England vote for unchanged policy was so close, the market is reluctant to completely price out the risk of one last rate hike.

HUF: NBH to stress caution for the rest of the year

There is only one event on the agenda in the CEE region today and that is the meeting of the National Bank of Hungary. Today's meeting seems like a done deal – the effective interest rate and the key interest rate will be merged at 13%, and monetary policy will thus enter the second phase of normalisation.

The question is what to expect in October and how much today's press conference will indicate. In any case, a cautious and hawkish tone can be expected. This goes against the dovish market expectations, which have priced in rate cuts in the 75-100bp range at the following meetings and high EUR/HUF levels at 390. Thus, the hawkish tone should be an impetus for the market to reassess expectations, especially at the short end of the curve, and support the forint back to levels safely below 390 EUR/HUF.

Source: ING

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Danske Bank

Economic

Bond

Stocks

Commodity

Forex

The most relevant data release today is the U.S. consumer confidence indicator from the Conference Board. After some improvements over the summer consumer confidence fell in August and consensus is looking for a further small decline in the September print.

In Hungary, the central bank will announce its monetary policy decision. All analysts in Bloomberg consensus (we included) expect the interest rate to remain unchanged at 13.0%.

In Sweden, we receive PPI figures for August.

U.S.

Credit rating agency Moody's yesterday expressed concern over a potential government shutdown in U.S., which it argues would reveal institutional and governance weakness not seen in other Aaa-rated countries.

Fed

Minneapolis Fed President Neel Kashkari overnight said that he expected the Fed to raise interest rates one more time this year and keep policy tighter for longer if the economy proves stronger than expected.

Energy

Natural gas prices have risen to the highest level since April over the past week. The price increase comes despite still mild autumn weather, increased energy production from wind turbines and end to the strike among Australian LNG workers. Instead it might owe to unstable natural gas flows from Norway due to maintenance and higher global demand for LNG.

Equities were mixed on Monday

Europe and Nordics continued to bleed but U.S. managed to close a tad higher for the day. S&P 500 up 0.4% (after losing -3% last week), Stoxx 600 -0.6% (-1% last week) and Nordics -0.3%. No doubt yields play a crucial role in the current risk-off regime. Thereby, Monday started with huge differences between sectors and styles.

Bond proxy Orsted and Fortum were worst off, falling -4-5%. It is also worth noting that mainly defensives sold off while cyclical retail (Pandora and H&M flat), pulp (Stora Enso +1%) and industrials (Atlas +1%, Sandvik and Volvo 0%) held up.

Bash in line with our strategy though, where we highlight retail, pulp, banks and short cyclical industrials, financed by growth/quality defensives.

Overall, our value overweight has performed very well lately which of course speaks for some mean reversion at a later stage. U.S. futures are a notch lower this morning again.

Last week's higher for longer narrative extended yesterday with rates rising across the board for the 3y+ maturities. The higher rates came from the long end with 30y Germany ending almost 11bp higher on the day. The 10y and 30y Bund yields reached highest levels since 2011. There was no clear trigger for the significant sell-off led by the long end.

EUR/USD broke below 1.06 for the first time since mid-March. Meanwhile, USD/JPY is closing in on the highs of October last year as U.S. yields continue to climb. The SEK defied the shaky risk sentiment and traded strong on the back of the Riksbank starting their hedging program, with EUR/SEK briefly below 11.70 on the day. EUR/GBP traded above 0.87 for the first time since March as markets continue to digest the BoE disappointment last week.

Credit

Credit spreads widened modestly yesterday, with iTraxx Xover closing in 421.6bp (+4.9bp) and Main in 78bp (+0.8bp). However, despite the slightly downbeat sentiment, several primary market transactions were printed and reception was solid, with oversubscription around 2.0x for most transactions.

Nordic macro

In Sweden we get the PPI numbers for August (CET 8:00). Whereas we expect a further normalisation of the index that measures producers' prices of goods manufactured and sold in Sweden (HMPI), the index containing import prices might show a less favourable development, given the increase in oil prises during august. Riksbank's Per Jansson will hold a lecture on the Riksbank's objectives and tasks later today (CET 18:00).

To stay updated on all economic events of today, please check out our Economic calendar

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Owen Li

Commodity

Energy – European gas rallies

European natural gas prices saw further strength yesterday with TTF rallying by 11.69% to settle at a little over EUR44/MWh, its highest level since April.

Further disruptions to Norwegian supply appear to have provided a boost, with the Troll field seeing a delayed startup after a compressor test. The outage is affecting about 25mcm/day of capacity. This is happening at a time when there is also a planned outage at the Skarv field, impacting a little over 22mcm/day of capacity.

However, fundamentals in the short term remain comfortable, with European gas storage 95% full as we head closer to the start of the new gas year, which officially gets underway on 1 October.

Metals – Crude steel production softens

The latest data from the World Steel Association show that global crude steel production softened further to 152.6mt in August compared to 158.6mt in July. Crude steel production is now at its lowest level since February as demand from China remains weak. Compared to year-ago levels, crude steel production increased by 2.2% year-on-year with China output increasing by 3.2% YoY to 86.4mt, while the Rest of the World's production increased by 0.7% YoY to 66.3mt. Cumulative global crude steel production increased by 0.2% YoY to 1.26bn tonnes over the first eight months of the year.

For the year, major gains come from China and India with production increasing by 2.6% YoY to 712.9mt and 10.5% YoY to 92.2mt respectively. On the other hand, EU production dropped by 9.8% YoY to 85.7mt over the first eight months of the year.

Gold prices softened to US$1,915/oz yesterday as treasury yields continue to move higher on expectations of 'higher for longer' Fed policy rates. The Fed's latest dot plot shows that the tightening cycle may not be over yet and that the economic data could continue to be a major driver of future policy decisions. U.S. 10Y treasury yields have increased to a fresh five-year high and broken above 4.5%, which continues to weigh on gold prices.

Agriculture – Damage to Ukraine's Odessa port

Wheat prices firmed up yesterday on reports that Russia has 'significantly damaged' the Odesa port in Ukraine, one of the major ports for grain export. The latest attacks were reported to have damaged port infrastructure, grain storage facilities and warehouses at the ports. Ukraine's export of grains from the port has largely stopped after Russia pulled out of the export deal. However, recently a few ships were reported to have managed shipments from the port. The latest attacks are likely to stop any residual exports from the port and also lower the possibility of export resumptions from the port in the near term.

The USDA's weekly export inspection data for the week ending 21 September show that U.S. soybean and wheat shipments rose while corn exports slowed over the last week. U.S. weekly inspection of corn exports stood at 661kt, lower than the 676kt over the previous week and up from 550kt reported a year ago. For wheat, export inspections stood at 451kt, up from 423kt last week but lower than the 589kt seen for the same period last year. Soybean export inspections stood at 482kt, higher than 430kt from a week ago and 292kt from a year ago.

The USDA's latest crop progress report shows that 53% of the U.S. corn crop is rated in good to excellent condition, up from 51% in the previous week. Meanwhile, the harvest is progressing well with 15% of the crop harvested, up from 11% at the same stage last year and also above the five-year average of 13%. As for the U.S. soybean crop, 50% of the crop is rated good to excellent, down from 52% the previous week. However, the harvest is progressing well, with 12% of the area harvested, up from just 7% at the same stage last year. It is also higher than the five-year average of 11%. Finally, winter wheat plantings are falling behind last year with 26% of the area planted, down from 30% at the same stage last year and also lower than the five-year average of 29%.

Source: ING

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Samantha Luan

Economic

Forex

Dollar is being the standout performer this week, bolstered significantly by surging U.S. treasury yields. Dollar index, which gauges the greenback against a basket of six major currencies, reached a high not seen since the previous November, breaking 106 mark. Contributing to the bullish momentum, EUR/USD has plunged through a pivotal support level at 1.06, and USD/JPY is inching closer to 149 mark.

Interestingly, 10-year yield has surged to an impressive 4.5%, marking the highest point since 2007. Initially, a wave of risk aversion propelled Dollar during U.S. trading hours. However, after major stock indexes rallied to end in positive territory, the greenback's ascent moderated. Still, as major Asian markets trended downwards, Dollar managed to hold its ground.

At present, Swiss Franc is lagging, being the week's poorest performer, with the Euro not faring much better. British Sterling is aiming to pare back its losses from the previous week, while Yen is in a flux, with traders cautious due to potential interventions by Japanese authorities. Remarkably, despite Dollar's strength, commodity-linked currencies have managed to showcase some resilience.

Technically an immediate focus now is on whether 10-year yield could power through the medium term channel resistance to accelerate up, and the subsequent impact on other markets. If materialized, TNX could march further to next target at 61.8% projection of 1.343 to 4.333 from 3.253 at 5.100, which is above 5% mark. On the other hand, while a retreat from the current level cannot be ruled out, near term outlook in TNX will stay bullish as long as 4.362 resistance turned support holds. The market will likely get more clarity on these movements in the upcoming days. Surging Treasury Yields Propel Dollar to 10-month High, EUR/USD Breaks Key Support_1

Surging Treasury Yields Propel Dollar to 10-month High, EUR/USD Breaks Key Support_1

Surging Treasury Yields Propel Dollar to 10-month High, EUR/USD Breaks Key Support_2

In Asia, at the time of writing, Nikkei is down -0.92%. Hong Kong HSI is down -0.84%. China Shanghai SSE is down -0.33%. Singapore Strait Times is down -0.08%. Japan 10-year JGB yield is up 0.013 a 0.744. Overnight, DOW rose 0.13%. S&P 500 rose 0.40%. NASDAQ rose 0.45%. 10-yea ryield rose 0.104 to 4.542.

Fed's Kashkari: Strong economy might warrant another rate hike

Minneapolis Fed President Neel Kashkari said at an event overngiht that the strength of the economy might necessitate higher interest rates for an extended period.

Kashkari commented, "If the economy is fundamentally much stronger than we realized, on the margin, that would tell me rates probably have to go a little bit higher, and then be held higher for longer to cool things off."

In line with last week's updated dot plot from Fed, where 12 out of 19 members indicated a potential rate hike this year, Kashkari affirmed his position, stating, "I'm one of those folks."

However, Kashkari also pointed out a caveat, suggesting the possibility of rate cuts if inflation undergoes a swift decline next year. He elaborated, "Depending on what is happening in all the economic data that we look at, that then might justify backing off the federal funds rate — not to ease policy but just to stop it from getting tighter from here, and that's something obviously we'll have to look at."

Japanese officials weigh in on Yen's slide as it approaches 149 against Dollar

This week's decline of Yen against Dollar, which seems poised to breach 149 mark, has brought remarks from Japanese officials into sharp focus. Market participants are keen to decipher indications of when Japan might transition from verbal caution to active intervention, even though it's clear that Japan wouldn't pre-announce such a move.

Finance Minister Shunichi Suzuki, reiterating his consistent position, stated today, "Foreign exchange rates should be determined by market forces, reflecting fundamentals."

Suzuki emphasized that "Excessive volatility is undesirable," and assured that the government is monitoring the currency fluctuations with a "high sense of urgency". "We will respond as appropriate to excessive volatility without ruling out any options," he added.

Echoing Suzuki's sentiments, the newly appointed Economy Minister, Yoshitaka Shindo, stressed the significance of stable currency movements that mirror economic realities.

Pointing out the multifaceted impact of the Yen's position, Shindo elaborated, "Weak Yen has various effects on economy such as raising import costs for consumers, improving competitiveness of exporters."

With these comments, the stage is set for a heightened scrutiny of Japan's potential interventions in the currency market. Market participants will no doubt remain vigilant to further remarks and actions by Japanese officials in the coming days.

Looking ahead

The economic calendar is empty in European session. Main focus will be on U.S. consumer confidence to be released later in the day. U.S. house price index and new home sales will also be featured.

EUR/USD Daily Outlook

Intraday bias in EUR/USD is back on the downside as fall from 1.1274 resumed after brief consolidations. Sustained trading below 1.0609/34 cluster support will carry larger bearish implication, and target 1.0515 support next. On the upside, above 1.0672 minor resistance will turn intraday bias neutral and bring consolidations. But outlook will stay bearish as long as 1.0764 support turned resistance holds. Surging Treasury Yields Propel Dollar to 10-month High, EUR/USD Breaks Key Support_3

Surging Treasury Yields Propel Dollar to 10-month High, EUR/USD Breaks Key Support_3

In the bigger picture, focus stays on 1.0634 cluster support (38.2% retracement of 0.9534 to 1.1274 at 1.0609). Sustained trading below there would rase the chance of bearish trend reversal. That is, fall from 1.1274 could be reversing whole rise from 0.9534 (2022 low). But even if it's just a corrective move, deeper decline would be seen to 61.8% retracement at 1.0199. For now, risk will stay on the downside as long as 55 D EMA (now at 1.0825) holds, in case of rebound. Surging Treasury Yields Propel Dollar to 10-month High, EUR/USD Breaks Key Support_4

Surging Treasury Yields Propel Dollar to 10-month High, EUR/USD Breaks Key Support_4

Source: ActionForex

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FxPro Group

Forex

Germany's Ifo business climate index held steady in September at the previous month's level despite expectations of further deterioration.

The business climate indicator fell from 85.8 to 85.7, better than the expected 85.1 but still the lowest since mid-2020. Excluding this spike, the only time in modern history that sentiment was worse was in the nine months between November 2008 and July 2009.

The Current Situation Index is trying to find a floor, falling from 89.0 to 88.7. Expectations have slightly improved, with the relevant component rising from 82.7 to 82.9. It may be too early to talk about a turnaround, but previous turning points in this component have coincided with the EURUSD's turnaround in the following months. From this perspective, it is a reliable leading indicator for the markets.

Has German Business Climate Bottomed Out?_1

On previous occasions, however, the expectations index reversed sharply because of monetary easing and fiscal stimulus. This is not the case now, and the improvement in sentiment is in response to a period of low gas prices and slowing inflation. However, neither the issue of reliable gas supplies and energy prices in general nor the slowdown in inflation has been resolved.

Moreover, the ECB raised interest rates less than two weeks ago, in contrast to sharp cuts on previous occasions when business sentiment in Germany and the eurozone was similarly low. A further deterioration in sentiment cannot be ruled out without support from the government and ECB measures. In these circumstances, the scenario of a weaker single currency directly correlated with risk appetite remains a priority. Has German Business Climate Bottomed Out?_2