JPY rebounds after hitting fresh lows supported by verbal intervention

JPY: Verbal intervention & new PM Takaichi’s economic plans in focus

The yen has been the best performing G10 currency overnight resulting in USD/JPY falling to a low of 153.33 marking a reversal after it hit a fresh high of 154.48. The reversal of yen weakness has been driven in part by comments from officials in Japan. New Finance Minister Katayama reiterated that they are watching forex moves with a “high sense of urgency” after seeing “one-sided and rapid” FX moves recently. It was similar to the remarks made at the end of last week by Finance Katayama which marked a step up in verbal intervention. While we still believe that direct intervention to support the yen remains unlikely at current levels, Japanese officials will be hoping that verbal intervention will at least help to slow the pace of yen weakness. At the same time, market participants have been digesting comments from new Prime Minister Takaichi made in parliament overnight. She recognized that “we are still halfway to maintaining stable and sustainable inflation with wage increases”, and expects the BoJ “to continue to take appropriate monetary policy”  toward achieving its inflation target. The comments appears to suggest that she supports the BoJ’s cautious approach towards further monetary tightening. Yen weakness has been reinforced since the BoJ left rates on hold last week and refrained from proving a clear signal over the potential timing of the next rate hike.

Prime Minister Takaichi was speaking after pledging to put together the Japan’s new growth strategy by next summer. Earlier in the day she stated “under the thinking of responsible, proactive fiscal stimulus…we aim to strengthen Japan’s supply structure, increase incomes, improve consumer sentiment, boost corporate profits and increase tax revenues without raising taxation rates”. She also ordered the consideration of multi-year budget measures -something that existed during the Abenomics years. While she acknowledged that Abenomics helped create non-deflationary economic conditions, expanded employment and boosted corporate earnings, she did admit that the strategy saw only limited success on its growth strategy to entice private investment. The new growth strategy will make a roadmap to enhance private-public investments. She has ordered her growth strategy minister Minoru Kiuchi to decide on the pillars to be included in the upcoming economic package which s set to be backed by an extra supplementary budget by the end of the year. Takaichi refrained from commenting on the size of the supplementary budget although it has been reported it is likely to be bigger than last year’s which totalled JPY13.9 trillion. The Nikkei 225 equity index has risen by around 14-15% since the LDP leadership election at the start of last month reflecting investor optimism over the growth outlook under new Prime Minister Takaichi.                          

DXY REBOUNDS ALONGSIDE WIDENING YIELD SPREADS

Source: Bloomberg, Macrobond & MUFG GMR

CHF: High hurdle remains for SNB return to negative rates

The low yielding currencies of the Swiss franc and yen have underperformed over the last couple of weeks undermined by the ongoing improvement in global investor risk sentiment. MSCI’s ACWI global equity index has risen to fresh record highs supported by stronger than expected corporate earnings growth from the US and the recent trade truce between China and the US that has helped to further dampen downside risks to global growth. The correction lower for the Swiss franc was reinforced yesterday by the release of another weak inflation report from Switzerland. Headline inflation remained well below the SNB’s inflation target coming in at only 0.1% in October while core inflation slowed to 0.5%. It will keep pressure on the SNB to consider easing monetary policy further either by lowering rates back into negative territory and/or intervening in the FX market if required to prevent the Swiss franc from strengthen further and adding to disinflation risks in Switzerland. However, comments this morning from SNB Governing Board member Petra Tschudin continue to signal that there is a high hurdle for a return to negative rates. She stated that there is “currently no need to negative rates” and even claimed that the inflation forecast is “where we want it”. Recent developments have helped to prevent downside breakout for EUR/CHF and the pair has returned to the narrow range between 0.9300 and 0.9400 that has been in place since April/May.

CAD: Budget to lay out plans for looser fiscal policy

In contrast, the Canadian dollar has been one of the best performing G10 currencies over the last couple of weeks alongside the US dollar. USD/CAD attempted and failed to break back below the 1.4000-level after the BoC signalled that they are likely to pause their rate cut cycle in the near-term. The impact from the hawkish BoC guidance was then quickly offset by hawkish communication from Fed Chair Powell last week when he pushed back more strongly against market expectations for another 25bps Fed rate cut in December.

With the BoC judge that there is less room to loosen monetary policy further to support growth in Canada in the near-term, the government is expected to step up to the plate today when it outlines its plans for looser fiscal policy. Prime Minister Carney has confirmed that he plans to run a “substantial” deficit saying that “bold risks” are needed to reform an economy facing an unprecedented economic threats from the US. He emphasized that today’s budget will be about “building, taking control and winning”. Generational investments are expected in housing & infrastructure, defence & security, climate competitiveness & innovation, and reskilling & labour mobility. The budget is expected announce plans to run a much bigger budget deficit for the current fiscal year of CAD70-75 billion or higher which compares to the deficit of CAD42 billion forecast back in December. Defence spending is expected to be raised up to 2% of GDP, and they have pledged to raise to 5% of GDP by 2035. Canada’s plans for looser fiscal policy have been supported by the IMF who welcomed that they recognize the need to use their fiscal space in very testing times. Overall, a bigger fiscal stimulus plan should help to provide more support for the Canadian dollar in the year ahead if it successfully help to lift growth and reduce pressure on the BoC to lower rates further.

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com