Forex
Yen jumps on suspected intervention, sterling hits one-year high
(This July 17 story has been corrected to change the company name to BNY from BNY Mellon (NYSE:) in paragraph 7)
By Rae Wee and Dhara Ranasinghe
SINGAPORE/LONDON (Reuters) – The yen rose sharply on Wednesday in what traders suspected was likely the result of another intervention from Japanese authorities to prop up the battered currency from multi-decade lows.
The move in the yen was the standout in a busy day in currency markets, where the pound jumped after hotter than expected British inflation data and the dollar dipped across the board, with the dropping to a four-month low.
The dollar was last 1% lower against the yen at 156.75, extending its sudden fall shortly after the London trading session began, a move traders attributed to Japan’s intervention.
At one point, the dollar reached as low as 156.1 yen, having been at a 38-year high of 161.96 yen in early July.
Japan’s Ministry of Finance did not respond to requests for comment. Japan’s top currency diplomat Masato Kanda said he would have to respond if speculators caused excessive moves and that there was no limit to how often authorities could intervene, Kyodo News reported.
Bank of Japan data suggests Japan bought nearly 6 trillion yen via intervention last Thursday and Friday.
“Current valuations are still stretched and the yen is still undervalued, so a bit more activism in FX markets from Japan is the way to correct any misalignments,” said Geoff Yu, senior macro strategist at BNY in London.
“But we have to wait for an official confirmation.”
The yen also made outsized gains against other currencies. The euro was last down 0.7% at 171.34 yen, while sterling fell 0.62% to 204.2yen.
INFLATION AND RATES
Elsewhere, the British pound rose 0.5% and hit a one-year high against the dollar of $1.3032 on data that showed UK inflation rose slightly more than expected.
Headline inflation held at 2% on an annual basis in June against forecasts for a 1.9% increase, while the closely watched services inflation came in at 5.7%.
That sent traders paring back bets of a rate cut from the Bank of England in August.
“Today’s strong services inflation numbers suggest the upcoming decision will be a close call,” said analysts at Nomura. “Much will now hinge on tomorrow’s labour market report, and specifically pay growth.”
The pound also strengthened to a near two-year top on the euro, which fell 0.18% to 83.85 pence, its lowest since August 2022.
There was volatility elsewhere too. The Swiss franc strengthened with the low-yielding, safe-haven currency possibly caught up in the ructions involving the yen, which has similar properties.
The dollar was down 0.66% on the franc at 0.8877, while the euro dipped 0.4% to 0.9706.
The euro gained against the dollar however, and was up 0.3% at $1.0933, a four-month high, while the Australian dollar tacked on 0.15% to $0.6747.
That left the dollar index, which tracks the unit against six peers, down 0.46% at 103.75.
Signs that inflation is slowing in the United States, boosting investor confidence that rate cuts are coming, has been weighing on the broad dollar.
Investors have fully priced in a rate cut from the Fed come September, and are expecting more than 60 basis points worth of easing by the year end.
While Tuesday’s U.S. retail sales data pointed to consumer resilience and bolstered second-quarter growth prospects, it failed to alter market views.
The New Zealand dollar was last 0.64% higher at $0.6087, helped by Wednesday’s data that showed domestically driven inflation remained high in the second quarter, even as the headline figure missed expectations.
Still, markets are sticking to bets of about three rate cuts from the Reserve Bank of New Zealand this year.
Investing.com – The US dollar has gained more ground as the US presidential election draws near, UBS noted, with the market seeing rising odds of a win for Republican candidate Donald Trump.
A new USD-positive over the past week has been media reports of somewhat better outlook for Donald Trump in the latest polls, as outcomes that allow for policies such as more aggressive tariffs are viewed as more USD positive.
“Higher odds of a Trump presidency are likely to be associated with a stronger USD near term,” said analysts at UBS, in a note dated Oct. 16.
Where does this leave us now with our USD views?
Our expected ranges between Sep–Dec 2024 incorporated the possibility of a material USD rebound between now and year end, even if our year-end forecasts see a modestly lower USD from current levels.
Last week, with an eye to our year end forecast, we entered a long call reverse knockout, but we are not willing to implement a similar trade yet for and .
The spot is still far enough from our range extremes and high JPY implied volatility and negative carry make long JPY positions unattractive so close to US elections.
Turning to this week’s ECB meeting, the market is very confident that another 25bp rate cut will be delivered and we do not have a strong reason to disagree.
Market expectations are very muted for any form of surprise, and risk reversal skews bid again for EUR puts point to a market that is already primed for the risk of EUR softness.
With market pricing in line with our economists’ terminal rate expectations, we see EUR/USD as more exposed to US developments near-term, leaving us reluctant to fade recent softness on ECB reasons alone.
At 06:30 ET (10:30 GMT), EUR/USD rose 0.1% to 1.0894, USD/JPY gained 0.1% to 149.34 and AUD/USD fell 0.2% to 0.6685.
Investing.com – The European Central Bank holds its latest policy-setting meeting later this week, and Citigroup advises selling any rallies in the euro around this key event.
Markets are pricing in around 49 basis points of easing over the remaining two ECB meetings this year, which could limit dovish repricing around Thursday’s event, according to analysts at Citi, in a note dated Oct. 15.
“We see scope for a tactical bounce in EUR around this Thursday’s ECB meeting, which we like fading into November as US election risk premium materializes,” Citi said.
That said, “we like fading any subsequent rallies in EUR as we approach November and US election risk premium gets better priced.”
There is some evidence of this unfolding, the bank added, as EUR looks undervalued on its short-term fair value model and as Citi’s FX Positioning data suggests adding to EUR shorts.
“But our broader FX election basket still screens as undervalued relative to Trump betting markets, and we remain short EURUSD in both spot and options,” says Citi. “We would look to sell any retest of the 1.10 double top neckline — any break above there risks a move towards our adjusted stop of 1.1050, but if that resistance holds, we have higher conviction of a move towards our (and the double top) target of 1.08, with potential overshoot towards 1.07.”
At 05:25 ET (09:25 GMT), traded largely flat at 1.0892, almost 2% lower over the last month.
Investing.com – The U.S. dollar edged higher Wednesday, trading near two-month peaks on expectations of modest rate cuts from the Federal Reserve this year, while sterling slumped after benign inflation data.
At 04:15 ET (08:15 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 103.180, remaining close to Monday’s two-month peak.
Dollar helped by trimmed rate cut expectations
Recent data indicating a resilient economy coupled with slightly hotter-than-expected inflation in September have led market participants to trim bets for an aggressive U.S. rate reduction.
Adding to these expectations were comments from Atlanta Federal Reserve President on Tuesday, who said he had penciled in just one more interest rate reduction of 25 basis points this year when he updated his projections for last month’s U.S. central bank meeting.
Most market participants see two more cuts this year, totaling 50 bps, and traders currently lay 92% odds for a 25-basis-point cut when the Fed next decides policy on Nov. 7, with an 8% probability of no change, according to CME Group’s (NASDAQ:) FedWatch Tool.
Sterling slumps after inflation release
In Europe, slumped 0.5% to 1.3003, after data showed British inflation fell more than expected in September, paving the way for a rate cut next month.
The UK’s fell to 1.7% on an annual basis, below the forecast 1.9% and the 2.2% recorded a month earlier.
This was the first time it had fallen below the Bank of England’s 2% target since April 2021, and added to data seen earlier in the week that showed British pay grew at its slowest pace in more than two years.
“The data is unequivocally dovish for the Bank of England and paves the way for rate cuts at the two remaining meetings this year (November and December),” said analysts at ING, in a note.
“Given the comments by Governor Andrew Bailey earlier this month suggesting the BoE could increase the pace of easing, markets may be tempted to price in some chance of a 50bp rate cut in November.”
traded 0.1% lower to 1.0882, ahead of Thursday’s policy-setting meeting by the European Central Bank.
The has already lowered rates twice this year and a cut to the 3.5% deposit rate this week is almost fully priced in by financial markets.
“EUR/USD is predominantly driven by external factors. The substantial drop in oil prices has narrowed the scope for a further drop based on market factors, but we continue to suspect that pre-US election positioning should favor a weaker EUR/USD,” said ING.
Yuan nurses weekly losses
fell slightly to 7.1179, with the yuan nursing losses this week as sentiment soured over the country’s plans for more stimulus.
China’s Ministry of Finance said it will enact a slew of fiscal measures to boost growth, but did not specify the timing or size of the planned measures, spurring uncertainty over its effectiveness.
rose 0.2% to 149.43, with the pair climbing closer to the 150 resistance level.
data due later this week is expected to offer more cues on the Bank of Japan’s plans to hike rates further.
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