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Swiss franc, yen modestly up, but off highs, as Iran, Israel defuse tension

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By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) -The safe-haven Swiss franc and Japanese yen pared gains on Friday after Tehran signaled it has no plans to retaliate against Israel, which launched what has been described as a limited-scale attack on Iran overnight.

Both currencies jumped against their peers after news of Israel’s action, but their gains have slowed.

In afternoon trading, the dollar fell 0.2% against the Swiss franc to 0.91 franc. It dropped as low as 0.9011 franc overnight, a roughly two-week low, following news of Israel’s move.

Against the yen, the dollar was last slightly down at 154.57 yen. The greenback slid as low as 153.59 yen after Israel’s news.

Iranian media and officials described a small number of explosions, which they said resulted from air defenses hitting three drones over the city of Isfahan in central Iran. A senior Iranian official told Reuters there were no plans to respond against Israel for the incident.

“The market initially reacted poorly because of the premise of an Israel response,” said Eugene Epstein, head of structuring for North America at Moneycorp in New Jersey.

“The question is: does this conflict drag out? At the moment, Iran’s response to Israel is interpreted as a de-escalation, for now. Therefore we have seen a reversal of pretty much everything.”

People familiar with the matter told Reuters that Israel attacked Iran days after Iran launched an unprecedented assault on Israel in response to a suspected Israeli strike on its consulate in Syria.

Markets initially reacted sharply to the news of the latest Israel initiative, which sparked a sell-off in risk assets, caused oil and gold prices to jump, and ignited a rally in U.S. Treasuries and safe-haven currencies.

The , which tracks the currency against six major peers, also rose but gave up its gains to stand little changed on the day at 106.17.

Currencies bounced around throughout the European and North American sessions, with the euro initially falling, but was flat at $1.0648 in late-afternoon trading. Sterling fell 0.5% to $1.2370.

The broad theme of the last few weeks has been a surging dollar on the back of a strong U.S. economy. The euro has been down 1.3% so far this month, while sterling has fallen 2%.

Hot data, especially figures last week showing inflation rose to 3.5% in March, has caused traders to rapidly downsize their bets on Federal Reserve interest rate cuts this year to fewer than rate cuts, most likely starting in September. That has caused U.S. bond yields to spike, boosting the to its highest since November earlier this week.

“Investors are still focused on the Fed mainly, instead of geopolitics,” said Boris Kovacevic, global market strategist at Convera in Vienna, Austria. “The broader, bigger picture is the higher for longer theme in the U.S. rates.”

Asian currencies have come under particular pressure, and finance chiefs in the United States, Japan and South Korea this week issued a rare trilateral warning over the two Asian nations’ sliding exchange rates, raising the prospect of a potential joint intervention.

Bank of Japan Governor Kazuo Ueda said on Thursday the central bank may raise interest rates again if the yen’s declines significantly push up inflation, highlighting the impact currency moves may have on the timing of the next policy shift.

The BOJ will hold its monetary policy meeting next week. Data on Friday showed Japanese core inflation slowed to 2.6% year-on-year in March, from 2.8%, but remained above the central bank’s 2% target.

© Reuters. File photo: Examples of Japanese yen banknotes are displayed at a factory of the National Printing Bureau producing Bank of Japan notes at a media event about a new series of banknotes scheduled to be introduced in 2024, in Tokyo, Japan, November 21, 2022. REUTERS/Kim Kyung-Hoon/File photo

Japanese Finance Minister Shunichi Suzuki on Friday have fresh warnings to speculators about pushing down the yen too much, noting that he would take appropriate action against excessive currency market moves.

In cryptocurrencies, bitcoin rose 1.1% to $64,287 ahead of the widely anticipated halving event either later on Friday or over the weekend. halving refers to a technical adjustment built into the digital currency’s code which reduces the rate at which new coins are created.

Forex

Dollar steadies, but on track for sharp weekly loss

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Investing.com – The U.S. dollar edged higher in European trade Friday, but was on track for a hefty weekly fall after cooling inflation and weak retail sales brought Federal Reserve rate cuts back into focus. 

At 04:10 ET (08:10 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% higher at 104.580, marginally above a five-week low just below 104 seen earlier this week.

Dollar steadies after hawkish Fed speak

The dollar has recovered to a degree as several Fed officials, specifically members of the bank’s rate-setting committee, said that they needed much more confidence that inflation was coming down, beyond some easing inflation in April.

“I now believe that it will take longer to reach our 2% goal than I previously thought,” St. Louis Federal Reserve president Loretta Mester said on Thursday, adding that further monitoring of incoming data will be needed. 

Federal Reserve Bank of New York President John Williams agreed with this view. 

“I don’t see any indicators now telling me … there’s a reason to change the stance of monetary policy now, and I don’t expect that, I don’t expect to get that greater confidence that we need to see on inflation progress towards a 2% goal in the very near term,” Williams said.

However, the dollar is still on course for a weekly loss of around 0.7% after the milder than expected U.S. data raised expectations the will deliver two interest rate cuts this year, probably starting in September.

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U.S. were also flat in April and softer-than-expected, and manufacturing output unexpectedly fell.

“Our view for the near term remains that we could see a further stabilisation in USD crosses as markets await the next key data input: April core PCE on 31 May,” said analysts at ING, in a note.

Euro slips ahead of CPI release

In Europe, traded 0.1% lower to 1.0860, having traded as high as 1.0895 in the wake of U.S. inflation release, but the single currency is still up around 0.9% on the dollar this week.

The final reading of the is due later in the session, and is expected to show inflation rose by 2.4% on an annual basis in April.

The is widely expected to cut interest rates in June, but traders remain unsure of how many more cuts, if any, the central bank will agree to over the course of the rest of the year.

Traders have priced in 70 basis points of ECB cuts this year – a lot more than the just under 50 bps of easing priced in for the Fed.

fell 0.1% to 1.2658, but is still on track for gains of around 1% this week.

The Bank of England is also expected to cut rates from a 16-year high this summer, but volatility is likely to be limited ahead of the release of key U.K. inflation figures next week.

Yen slips after weak Japanese GDP data

In Asia, rose 0.3% to 155.87, close to breaking above 156, after weaker-than-expected Japanese data for the first quarter. 

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traded 0.1% higher at 7.2209, moving back to six-month highs above 7.22 after data earlier Friday showed grew more than expected in April, but growth in slowed sharply, while a decline in Chinese house prices accelerated last month.

 

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Forex

Hedge funds play a weak Japanese yen

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By Nell Mackenzie

LONDON (Reuters) – Pressure on Japan to prop up a weak yen may have ebbed, but currency weakness remains a headache for Tokyo.

The yen is down 9.4% against the dollar so far this year, and looks set for a fourth year of declines. That’s created a two-speed economy, with exports and tourism benefiting from a more competitive exchange rate while households and small businesses are squeezed by rising import prices.

Four investment managers shared four ideas on how to trade yen weakness. Their views do not represent recommendations or trading positions, which they cannot reveal for regulatory reasons.

1/ FLORIN COURT CAPITAL

* Diversified systematic asset manager

* Size: $2 billion assets under management (AUM)

* Founded in 2016

* Key trade: Short-Asia currencies ex-Japan

Florin Court CIO Doug Greenig says that instead of playing a weak yen, investors should put on bets against Asia’s emerging market currencies.

“Investors can consider shorting other Asian currencies like the Korean Won or the Thai Baht, where real interest rates are also relatively low versus some other EM currencies,” Court said. “And you don’t directly face the risk of BOJ intervention.”

The Bank of Japan (BOJ) was believed to have intervened twice, on April 29 and May 1, to stabilise a yen that had slumped to 34-year lows around 160 per dollar. It is now around 155.6.

The yen has weakened sharply for clear reasons: real interest rates are much higher outside of Japan.

U.S. rates have been kept high by loose fiscal policy and a robust economy. By contrast, Japan does not have a free hand in raising policy rates, Greenig said.

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Japan’s huge public debt pile is 263% of GDP, but the Bank of Japan holds almost half of that, so the situation might be more nuanced than it looks, he said.

2/ AQR CAPITAL MANAGEMENT

* Systematic asset manager

* Size: $108 billion

* Founded in 1998

* Long Japanese stocks

Jonathan Fader, managing director in the Macro Strategies Group at AQR Capital Management, says BOJ intervention complicates matters for yen bears but the key driver of yen weakness remains – accommodative Japanese monetary policy while rates elsewhere are at multi-year highs.

He favours Japanese stocks that benefit from currency weakness.

Fader noted that the tight relationship between the yen and Japanese shares broke down as Tokyo stepped up verbal intervention. But stock tailwinds remained, such as governance improvements and banks benefiting from an end to negative rates.

The BOJ in March delivered its first rate hike in 17 years.

“Should yen volatility calm down, Japanese shares could well resume their outperformance,” said Fader.

Japan’s blue-chip is off record highs hit earlier this year, but is still up some 16% year-to-date.

3/ MOUNT LUCAS MANAGEMENT

* Macroeconomic hedge fund

* Size: $1.5 billion

* Founded in 1986

* Dollar/yen forwards

For David Aspell, partner at Mount Lucas, a large U.S/Japan rate gap means investors will continue to use the yen as a funding currency for carry trades.

One way to play yen weakness is through currency forwards, contracts that allow investors to hedge FX risk, he said.

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Buying a dollar/yen one-year forward contract which trades at a discount to current levels means the currency pair would need to weaken over a year to loose money, said Aspell. Investors would gain if there is no change or dollar/yen strengthens.

“Intervention has the best chance of working medium term when it is a genuine surprise and when it is helped along by the fundamentals,” Aspell said.

4/ PINEBRIDGE INVESTMENTS

* Global asset manager

* Size: $168.2 billion

* Independent since 2010

* Buy high quality, investment grade portions in short duration, refinanced U.S. 2024 CLOs

The BOJ has also abandoned yield curve control where it capped long-term interest rates around zero, but said it would keep broadly buying government bonds as before and ramp up purchases if yields rise rapidly.

Since this policy’s 2016 start, Japanese investors sought higher returning investments elsewhere. The plus 5% yields on investment grade tranches (portions) of U.S. collateralized loan obligations (CLOs) drew many.

“Right now as investors in CLOs, they are our competition because they have such a strong demand for U.S. fixed income assets,” Laila Kollmorgen, a PineBridge managing director, adding that what Japanese investors do will determine how Pinebridge invests later in the year.

Now that JGB yields have hit decade highs, this might tempt Japanese investors to bring funds back home.

“We must remain nimble,” Kollmorgen says.

While the typical CLO deal length is eight years, she’d opt for newly reset CLOs in 2024. On these, the deal time has been restarted. She’ll look for an extended three-year reinvestment period, refinanced debt and lender protection against the bonds being paid back in full during the first year.

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Dollar selling “looks exaggerated” – HSBC

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Investing.com – The U.S. dollar is on track for a hefty weekly fall on renewed dovish hopes for the Federal Reserve, but this selling “looks exaggerated”, according to HSBC.

At 05:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded at 104.640, on course for a weekly loss of around 0.5%, as well as a monthly drop of 1.3%. 

The USD has suffered from a “double whammy” lately, according to analysts at HSBC, in a note dated May 16. 

Softer-than-expected U.S. activity data and the lack of further upside surprises in April inflation data have rejuvenated dovish hopes for the Fed–hitting the USD through the rates channel–and helped spur risk appetite–hurting the USD through the risk appetite channel which has shown recent signs of gaining more traction. 

However, this two-pronged hit to the USD can also play in the opposite direction, the bank added.

After three months of upside surprises, the Fed may need more than one month’s in line inflation data to be confident about inflation moving to target. 

Also, Fed rhetoric arguing for patience might unsettle the market ahead of the June FOMC where new “dots” lie in wait. 

“We look for the USD selling of the last month to stop in the coming weeks, with a bounce possible against those currencies that could deliver a dovish surprise, or which are vulnerable to risk aversion,” the U.K.-based bank said.

HSBC has chosen to express this expected shift in dollar tone against the euro – opening a trade idea to sell at $1.0880, targeting $1.0550, with a stop at $1.1050.

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At 05:25 ET, EUR/USD traded at $1.0841, on course for a weekly gain of 0.7% and a monthly increase of 1.9%.

“While ECB rhetoric suggests a June rate cut seems all but certain, we believe the market may be under-pricing the risk that the door will be left open to a follow-up cut in July,” the bank said.

 

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