Fiscal fears hit yen triggering step up in verbal intervention

JPY: Bigger fiscal stimulus fears weigh on yen as intervention risk rises

The yen has continued to weaken at the start of this week resulting in USD/JPY hitting a fresh high overnight of 155.38. It follows the release over the weekend of the latest GDP report from Japan confirming the economy contracted in Q3. While the contraction in GDP driven by weakness in residential investment and net trade is expected to prove temporary, it has encouraged market expectations for looser fiscal and monetary policies to support growth under new Prime Minister Takaichi. Yen weakness has coincided with a sell-off at the long-end of the JGB market indicating that building fiscal concerns are contributing to a weaker yen. The 30-year JGB yield has moved back within touching of the high from 7^th October at 3.35% just after Sanae Takaichi won the LDP leadership election held on 4^th October. The JGB market sell-off was encouraged overnight by comments from Finance Minister Katayama who stated that while she couldn’t comment in detail at this stage, the upcoming fiscal stimulus package has become “somewhat larger so far”. It has already been speculated that the size of the supplementary budget will exceed last year’s total of JPY13.9 trillion and the local media reported over the weekend it could total around JPY17 trillion. However, Bloomberg has reported as well overnight that a group of LDP   Lawmakers have urged Prime Minister Takaichi to craft a much larger budget. The Responsible and Expansionary Fiscal Policy Caucus have called for an extra budget totalling about JPY25 trillion. The report has added to fiscal concerns and weighed on the yen.

One factor which has helped to dampen upside for USD/JPY overnight is uncertainty over potential support for the yen from intervention as the pair moves closer to levels when Japan last intervened in July 2024. Finance Minister Katayama stepped up verbal intervention overnight stating she is “deeply concerned about recent FX moves” and is watching “FX moves with a high sense of urgency”. She reiterated that it is vital that “FX moves stably, reflecting fundamentals” but is currently seeing “rapid, one-sided moves in the FX market”. It was a view shared by BoJ Governor Ueda after he met with Prime Minister Takaichi, when he stated it was “desirable for FX to move stably, reflecting fundamentals”. Governor Ueda noted he discussed FX with Prime Minister Takaichi and will cooperate with the government in watching FX moves and monitoring the impact. At the same time, Governor Ueda noted that he discussed domestic and overseas economies and monetary policy with Prime Minister Takaichi. He stated that Prime Minister Takaichi didn’t have a specific request helping to ease concerns that she would put pressure on the BoJ to slow the pace of monetary easing. Governor Ueda stuck to his view that they will make appropriate judgements on monetary policy based on the data as he told Prime Minister Takaichi that the BoJ is in the process of gradual adjustment of easing. The comments have helped to provide some temporary relief for the yen but are not sufficient to reverse the weakening trend.

BIGGEST JPY SELL-OFF SINCE RUN UP TO LAST YEAR’S US ELECTION

Source: Bloomberg, Macrobond & MUFG GMR

USD: Dovish comments from Fed officials keep door open for December cut

The US dollar is trading in a holding pattern against the other major currencies of the euro, pound and Swiss franc at the start of this week ahead of the release of the latest FOMC minutes on Wednesday and nonfarm payrolls report for September on Thursday. Ahead of those key events, US yields dropped back yesterday encouraged by dovish comments from Fed officials which keep the door open for another rate cut in December, and were triggered by the sell-off in US equities overnight. The Nasdaq composite equity index closed below the 55-day moving average for the first time since May adding to investor unease over risk assets in the near-term. Market participants are eagerly awaiting the release of Nvidia’s latest earnings report for Q3 on Wednesday which will be important in determining whether the recent correction lower for US AI/tech stocks will extend further heading into year end given Nvidia’s central role in the AI boom.   

The US rate market has moved back to pricing in closer to a 50:50 probability of a December rate cut following dovish comments yesterday from Fed Governor Waller and Vice Chair Jefferson. Governor Waller’s speech was titled “the case for continuing rate cuts”. He emphasized that the labour market is “still weak and near stall speed” and that data “fog” is not a good reason for not cutting in December. He believes that a December rate cut “will provide additional insurance against an acceleration in the weakening of the labour market and move policy toward a more neutral setting”. It follows earlier comments from Fed Vice Chair Jefferson who noted that “I see the balance of risk in the economy as having shifted in recent months with increased downside risks to employment compared to the upside risks to inflation, which have likely declined somewhat recently”. Recently, New York Fed President Williams, Fed Governor Cook and San Francisco Fed President Daly indicated they were leaning more towards a cut as well. As a result, we are sticking to our call for another Fed cut in December unless evidence emerges of a strong pick-up in labour demand in the month ahead. It remains a key assumption behind our  forecasts for a weaker US dollar (click here).           

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com