Upward momentum for USD/JPY has been reinforced

JPY: Fiscal policy concerns continue to weigh on the yen

The yen has continued to weaken overnight resulting in USD/JPY hitting a fresh high of 157.78. The yen has now fully reversed all of its year to date gains against the US dollar even as the dollar index remains around -7.5% lower highlighting the clear underperformance of the yen. The weakening trend for the yen has occurred alongside a sharper sell-off in the JGB market. At the worst point the 10-year and 30-year JGB yields had jumped higher by around 6-7bps hitting fresh cyclical highs. The 30-year JGB yield is on track to close higher for the eleventh consecutive day. The price action highlights building unease amongst JGB market participants over the potential scale of fiscal easing and additional debt issuance likely required to fund the supplementary budget. Public broadcaster NHK has reported overnight that the Japanese government is making final arrangements to compile an economic stimulus package of JPY21.3 trillion with general account spending to be around JPY17.7 trillion. The unfavourable JGB market reaction sends a warning signal to the government that there is less appetite to absorb a significant expansion of fiscal policy in the current market environment which would curtail room to implement Abenomics 2.0 under Prime Minister Takaichi. 

A challenge acknowledged by Finance Minister Katayama when she spoke before parliament overnight, and stated “it’s extremely difficult to strike the right balance between inflation, bond yield and a weak yen”. The yen sell-off is creating more concern amongst Japanese officials but verbal pushback is not yet strong enough to deter speculative selling. USD/JPY has now risen by 10 big figures since Sanae Takaichi won the leadership election in early October. At a press conference overnight, Japan’s chief cabinet secretary Minoru Kihara stated “we are concerned about the recent one-way and sudden movements in the foreign exchange market. It’s important for exchange rates to remain stable, reflecting fundamentals”. Finance Minister Katayama met with BoJ Governor Ueda and Growth strategy Minister Kiuchi earlier in the day but the yen did didn’t come up as a specific topic. The comments are not yet indicating that intervention to support the yen is imminent although USD/JPY is close to levels that Japan last intervened in July 2024. For intervention to be more effective at supporting the yen, Japan would also have to address current market concerns over overly loose monetary and fiscal policies. As we saw yesterday, the yen sell-off was reinforced by comments from Finance Minister Katayama that the government would make a technical tweak to the BoJ-Government accord which played into fears that the government would put more pressure on the BoJ to delay policy normalization. However, the tweak would just involve changing the name of the relevant government body involved to the Japan Growth strategy Headquarters while keeping the essence of the agreement unchanged.                                

CONCERNS OVER TAKAICHI POLICY SHIFT FUELLING WEAKER YEN

Source: Bloomberg, Macrobond & MUFG GMR

USD: December Fed rate cut expectations fade ahead of September NFP report

The move higher in USD/JPY has been supported by broad-based US dollar strength. The dollar index has risen back above the 100.00-level and closed above resistance from the 200-day moving average for the first time since early in March sending a bullish technical signal for US dollar performance heading into year end. The US dollar has been boosted by a further scaling back of Fed rate cut expectations. The US rate market is now only pricing in around 6bp of Fed rate cuts compared to around 11bps at the start of this week.

Market participants have become less confident that the Fed will deliver a third back-to-back rate cut in December after the Bureau of Labour Statistics announced yesterday that it has cancelled the October nonfarm payrolls report. In stead the BLS will incorporate the October payrolls figures into the November nonfarm payrolls report. The release of the November nonfarm payrolls report has been delayed until 16^th December. Importantly the new delayed release date will come after the next FOMC meeting on 10^th December. It will mean that the Fed will only have today’s nonfarm payrolls report for September when they make their decision in December. The lack of clarity over the health of the labour market in October and November could tip the balance in favour of the Fed taking a more cautious approach and leaving rates on hold in December. As a result, today’s NFP report for September would have to be much weaker than expected to encourage market participants to price back in a higher probability for a December cut and weaken the US dollar. It appears more likely now that our year end US dollar forecasts are too low if the Fed does not cut rates as we had expected.       

Furthermore, the scaling back of Fed rate cut expectations has been encouraged by the release of hawkish minutes from the last FOMC meeting that highlighted policy divisions. The minutes revealed that “many” participants thought it would likely be appropriate to keep rates on hold in December compared to “several” who thought a cut could well be appropriate. While “many” is not necessarily a majority on the FOMC, it does indicate a higher risk of skipping a cut at the December meeting. A decision to leave rates on hold in December would be viewed more of a temporary pause than an end to the easing cycle. The minutes revealed that "most" participants thought further rate cuts would be appropriate over time.

Finally, the release of stronger than expected corporate earnings overnight from Nvidia  should also help to ease downside risks for the US dollar heading into year end from the risk of a deeper correction lower for US AI/tech stocks. The Nasdaq equity index has recently fallen by around -6% from its high point in late October reflecting investor unease over lofty valuations. The earnings beat from Nvidia will help to ease some of those concerns in the near-term. Nvidia announced that revenues rose by 62%Y/Y to USD57 billion in the three months to October coming in above consensus estimates compiled by Visible Alpha of USD55 billion. Nvidia expects revenue to pick-up to USD65  billion for the current quarter which was around USD3 billion above consensus expectations. If global investor sentiment risk sentiment improves it would be another supportive development for USD/JPY.            

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com