Will weak JPY encourage BoJ to bring forward rate hike plans?

USD: Fed leadership leave door open to December rate cut

The major foreign exchange rates have remained relatively stable overnight at the start of the holiday shortened week with Thanksgiving falling on Thursday. The dollar index has continued to trade just above the 100.00-level after closing above resistance from the 200-day moving average at around 99.800 last week. It was the first time the dollar index has closed above the 200-day moving average since early March providing a bullish technical signal for US dollar performance in the near-term. The dollar index is attempting to climb back into the 100.00-105.00 trading range that had been in place for most of 2023 and 2024. However, the US dollar’s upward momentum was dampened at the end of last week by dovish comments from New York Fed President Williams who delivered a strong signal that the Fed leadership is still planning to cut rates in December. He stated that “I still see room for a further adjustment in the near-term to the target range for the federal funds rate to move the stance of policy closer to the range of neutral”. He added that “looking ahead, it is imperative to restore inflation to our 2% longer-run goal on a sustained basis. It is equally important to do so without creating undue risks to our maximum employment goal”. The comments have encouraged US rate market participants to price back in a higher probability of a third back-to-back rate cut in December. The US rate market is currently pricing in around 16bps of cuts by year end compared to only 9bps on Thursday after the release of the delayed nonfarm payrolls report for September. We had assumed there was a higher probability that the Fed would leave rates on hold in December after the September nonfarm payrolls report was not weak enough on its own to justify another cut and the release of the nonfarm payrolls reports for October and November have been delayed until after the next FOMC meeting. However, it appears that the Fed leadership including Fed Chair Powell will still try to push through another rate cut even if there is more dissent from hawkish participants. A development that would curtail further upside for the US dollar heading into year end.

The dovish repricing of Fed rate cut expectations helped to provide support for the US equity market on Friday. The Nasdaq composite index closed up around 0.9% higher on the day after threatening to break below the 22,000-level earlier in the day. It was still the third consecutive weekly decline which is the longest run since February to April despite stronger than expected earnings last week from Nvidia. Market participants will be watching closely in the week ahead to if see the correction lower  for US AI/tech stocks deepens further which could begin to spill-over more into the FX market. The high beta G10 currencies of the New Zealand dollar, Norwegian krone and Australian dollar have been amongst the worst performing G10 currencies since US stocks peaked on 29^th October. However, there has not yet been a strong bid for safe haven currencies. The yen has been amongst the worst performers as well given negative domestic political developments have dominated price action. A deeper correction lower for US AI/tech stocks also poses downside risks for the US dollar heading into year end. Foreign purchases of US equities reached a record total of USD486 billion in the five months to September.

JPY WEAKNESS DRIVEN BY NEGATIVE DOMESTIC CONCERNS

Source: Bloomberg, Macrobond & MUFG GMR

JPY: BoJ signals it is moving closer to hike but will the government allow?

The yen has continued to trade close to recent lows at the start of the week after USD/JPY hit a high last week of 157.89. The pair has risen by around 10 big figures since Sanae Takaichi won the LDP leadership election. Last week’s yen sell-off was driven by heightened concerns over the government fiscal plans when they announced a larger than expected fiscal stimulus plan (click here). The 10-year JGB yield jumped to a new cyclical high of 1.85% at the end of last week before dropping back below 1.80% helping to ease yen selling momentum. The JGB market has been closed overnight for a holiday in Japan.

The sharp one-sided yen sell-off is generating building concern amongst Japanese policymakers who have signalled a rising risk of direct intervention to support the yen if the unwanted price action continues. Furthermore, BoJ officials have been indicating that yen weakness could encourage an earlier resumption of rate hikes. The Nikkei reported comments late on Friday from BoJ board member Kazuyuki Masu who stated “I can’t say what month it’ll be, but in term of distance, we’re close” to raising rates again. It was his first exclusive interview since joining the BoJ policy board in July. He believes that the policy rate is lower than the neutral rate and strongly believes we need to change that quickly”. The comments were notable as Kazuyuki Masu had previously been viewed as one of the more dovish BoJ board members. Earlier in the week both BoJ Governor Ueda and Junko Koeda had also indicated more concern over yen weakness and the need for policy normalization. Recent rhetoric supports another rate hike in December or January although market participants remain sceptical given the ongoing uncertainty over whether the government will push back against an earlier hike to maintain more supportive policy for growth.  While those doubts persist, the yen will struggle to rebound from deeply undervalued levels.

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com